Total Delivered Cost (TDC) is the amount of money it takes for a company to manufacture and deliver a product. However, we have observed that many companies do not make the best use of TDC in their supply chain planning process because of three common errors or oversights. First, many of them use a historical TDC metric, rather than a metric that is based on the supply chain costs they will incur now and in the future. Second, they often make oversimplified assumptions, ignore certain components of TDC, or use average accounting allocations rather than product-specific operational data when computing TDC. And third, companies often fail to use optimization technology to simultaneously make, for each product, the interdependent decisions in sourcing, production, warehousing, transportation, and distribution that will have an impact on TDC and yield the best overall future plan.
Cost of goods sold (COGS) is an accounting term to describe the direct expenses related to producing a good or service. COGS is typically listed on the income statement. We live in a dynamic world, and COGS is based on historical numbers and does not reflect the true costs incurred now and in the future, which should be used for strategic decisions.
So, when thinking process improvement with analytics especially with merger and acquisition rationalization, the process should include a review of the existing supply chain (COGS) and a supply chain network design study of manufacturing and distribution footprint and utilization with an emphasis on improving Total Delivered Cost. A supply chain network design study that includes TDC will enable profitable growth in a changing business environment.
New to TDC? Check out our e-book that explains the TDC concept and how to apply the same to drive up your bottomline.
For more background, read the Supply Chain Quarterly article, A Fresh Approach to Improving Total Delivered Cost. If you are evaluating a supply chain optimization project, drop us a line! Our experienced, close-knit team has seen it all. We can find inefficiencies in any link.
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