Add Total Delivered Cost Variances to Manage Your Supply Chain
It is often said that you can only improve what you measure. To that end, there has been a lot of progress in performance tracking and activity-based costing over the past 10 years. With the advent of better activity-based costing, leading companies generate monthly manufacturing variance reports at a detailed and actionable level. However, this does not appear to be the case in the supply chains of many of those same companies. At the end of this post, I’ll recommend some specific supply chain metrics to guide your supply chain improvement.
We routinely find that many companies have a very limited understanding of their supply chain costs: what they are, where they come from or why they’re happening. In a typical engagement with a new client, one of the first things we do is develop a picture of their supply chain current state with respect to flows, cost and service. We work with the client to gather all of the available information, which is much too often a very formidable task, until we can assign the cost from each operation that touches a product or intermediate from the time it is a raw material until it is delivered as a final product to the customer.
When the project team first presents the results to management, we invariably hear, “We don’t do that,” or “Those costs must be wrong.” Unfortunately, we sometimes hear, “There is no way we’re losing that much money at that customer.”
Clearly, there are times when the team learns something new and we have to adjust the costs. However, in the majority of cases we walk through the elements of the costs with management and the realization sets in that the numbers are correct and the costs really are that high. Now that we have all seen the true picture of the supply chain we can align on the effort required to improve it.
Supply chain managers, like their manufacturing counterparts, should demand ongoing metrics at the operational level that are actionable if they want to drive improvement in their supply chains. Reports that provide only the total freight spend, total warehouse spend or total person-hours worked in the supply chain vs. the plan don’t contain enough actionable information to drive performance.
I propose the following metrics as a starting point for managing the total delivered cost to the customer base and welcome your feedback on any metrics that I might have missed or that might replace one I’ve suggested.
Total Delivered Cost Supply Chain Metrics, a Start:
- Actual vs. target for shipping containers
- Actual loaded vs. the maximum allowable capacity for the commodity and shipping container combination
- Actual vs planned cost to serve variance reports at the customer/product level of detail with specific variances called out for
- Cost of Goods Sold (COGS)
- Mode exception (shipped by a premium mode of transport vs. the planned mode)
- Sourcing exception (shipped from a different location than the planned source)
- Fill exception (the difference in cost if the shipping container were filled to the maximum allowable capacity)
- Volume variance (total volume shipped vs. the planned volume to allocate fixed costs)
- Mix variance (change in the mix of products shipped vs. the plan and its impact on cost)
- Price variance (change in the price charged by carriers and other logistics service providers vs. the planned price)
With this set of metrics a supply chain manager should be able to quickly understand the reason for any changes in the total delivered cost to each customer, and thus the gross margin. Now that we can measure it, we can manage it.