So, I thought I’d start at the beginning with my first resolution: KNOW YOUR WORTH.
“Understanding the costs of your supply chain will allow you to make better decisions…period. Whether your aim is to improve customer service, reduce inventory, improve cash flow, grow the bottom line or a combination of these, you HAVE to have a handle on your costs.
Getting under the skin of the logistics, storage, purchasing and production costs incurred at all stages of your supply chain will allow you to streamline your operations and drive cost savings.
A detailed cost-to-serve analysis will give you all the data you need.”
What does ‘Cost-to-serve’ entail??
In order to fully understand the cost of your supply chain and logistics operation, a cost-to-serve piece is pretty vital.
In a nutshell, a cost-to-serve will give you each activity and element cost of servicing your customers….get your stopwatch, pencil and paper ready!
Typically, this begins at order processing. If this is fully automated though perhaps a sophisticated EDI system, the cost of this will be relatively small. You can calculate this roughly by taking the total number of transactions over a set period and dividing this by the cost of running and operating the system (any licensing fees, user labour costs, etc.) If you want to get detailed here or have particular issues around incorrect order entry, or heavy manual order management and amendments, you can also generate a cost element associated with amending orders.
How do you do that? Each time an order has to be amended, record the total time taken in user hours to do that. You’ll need to make sure you’ve got a good enough sample that you can confidently extrapolate that to give a yearly amount. I’d suggest a couple of weeks – perhaps at different times in the year – over a range of users.
Take the total time taken in hours each week say by the average user in amending orders, multiply that by the hourly wage rate and multiply up to give your annual cost of amending orders.
Continue this cost analysis exercise for all stages in your supply chain process.
At goods receipt:
- How long does it take to receipt the delivery?
- How many units on that delivery?
- What’s the total labour cost of goods receipt?
Average this across a good sample and extrapolate.
Put away of goods: (the same exercise).
- Total time taken to put away?
- How many units per hour?
- Labour cost?
Average and extrapolate. You can also include a nominal cost for any vehicles or tools used at put away to be thorough.
Order pick: (as ‘put away’ exercise but in reverse)
- How many units picked per hour?
- Labour cost? This includes labour to pick, pack and label.
- Cost of packaging used?
- Cost of labelling?
In a Manufacturing Environment:
If you work in this type of environment you may have separate cost elements for bringing items into the Kanban area, physical production, quality control, packing and put away into the dispatch warehouse.
Once you’ve got the goods out of the door, you can add on a cost element for any logistics costs. It’s likely that you’ll be able to get a good steer on this from any logistics contract agreements you have in place. If not, an assessment made on cost per unit based on industry standard transport rate is probably your best bet. You can find industry standard rates on various vehicle types by mile if you use a range of transport.
The True Cost to Serve:
Now you have covered each element in your supply chain you can quantify the true cost to serve of each item, average transaction, or strand of your logistics operations.
The real value of this information however, comes when you want to explore new options. You can model the cost elements of any new element in your supply chain to assess the potential benefits that it may bring.
You should also be able to quickly see the most cost heavy elements of your supply chain – your biggest risk areas, and biggest wins if you’re able to tackle them and drive improved costs.
About the Author:
Rachel Sellers is an experienced global commercial planner, and also an Associate Lecturer at the University of Manchester Business School
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