ACTIVITY BASED COSTING
A method which allows managers to better allocated costs associated with specific cost drivers.
Companies use benchmarking to identify best practices within industry which will enhance profitability, processes, efficiency, etc.
BULLWHIP EFFECT/BEER GAME
Unexpected changes in demand patterns will continue to escalate further up the supply chain. Problems tend to escalate in supply chains where communication is minimal between supply nodes. A small wave in the middle of the ocean may end up as a tidal wave near the shore. The bullwhip effect can best be described using the “Beer Game.” It is an exercise that showcases the problems that arise in a company with minimal communication in the supply chain. A quick 15 minute game graphically represents the variable opportunities that can be found in the supply chain. Feel free to e-mail me if you would like to know how the beer game could be used as a training tool at your company.
Causes of the Bullwhip Effect:
Beer Distribution Game
Beer Game Scenario
Play the Beer Game
Taming the Bullwhip Effect
CAUSE & EFFECT DIAGRAMS (FISH BONE)
This diagram also referred to as a fishbone diagram allows a person to drill down and find where a problem originates.
Cause and Effect
Fish Bone and Six Sigma
Links from iSixSigma
Cost Management – analyzing the costs of purchased goods in order to develop strategies to lower costs while improving supplier relationships. The following table is from a paper written by Lisa Ellram entitled “A Structured Method for Applying Purchasing Cost Management Tools.” The article was published by the International Journal of Purchasing and Materials Mangement 11-19. I highly recommend reading this article.
Questions to be Addressed During Cost Analysis/Overhead Analysis
1. Which costs are necessary and legitimate?
2. Are amounts estimated for the necessary cost items reasonable?
3. Is the overhead allocation to this item potentially subsidizing another item which the organization sells?
4. Have the correct allocation bases been used? If not, is it to our benefit to challenge the allocation methods?
5. Are only those expenses which should be allocated to our purchase so allocated?
6. Are there allowances for contingencies? Do these allowances seem legitimate?
7. Are profits reasonable enough, yet not excessive, to keep the supplier motivated?
Order Cost = (Annual Demand * Order Cost)/Order Quantity in Units
Purchasing Cost = Annual Demand * Price per unit
TOTAL PURCHASING COST
Total cost = Ordering Cost + Carrying Cost + Purchasing Cost
CPFR – Collaborative Planning, Forecasting and Replenishment
CPFR Benefits Calculator
The CPFR Value Proposition
e-Procurement – e-procurement vendors include Oracle, Ariba, and CommerceOne. This software allows electronic transactions to take place.
The ROI of the e-procurement system should include the cost of the technology platform, the cost of content management and the integration costs for the system to be live. Determine all benefits for an e-procurement system to find the ROI.
BENEFITS FROM E-PROCUREMENT
Consolidate supplier base – allows a company to work with fewer suppliers leveraging its ability to aggregate spend.
Improves communication – reduces variability in the supply chain.
Free buyers to work on strategic tasks – buyer’s spend less time on tactical buys and more time on strategic issues.
Decrease cycle times – especially important for companies in the technology industry.
Lower transaction and processing costs – automating the purchasing process will decrease the amount of non-value added activities
Reduce maverick spending – maverick spending is said to be 10%-20% higher than purchasing from companies with negotiated contracts.
Enhanced reporting and auditing tools – an e-procurement system will track all costs allowing a company to determine the spend to each supplier.
Improve compliance with approved suppliers increasing bargaining leverage
Better Approval Controls
Head count reduction
Better utilization of assets
Increase inventory turnover
Quicker ramp up for new employees
Faster response times
Indirect Goods have little differentiation and are primarily compete with price. The best items for e-procurement are indirect goods that are routinely purchased. The items classified as MROs are the most suitable for an e-procurement system. Most companies start with MRO due to the high probability of success running through e-procurement. Anticipated savings fro MRO items range from 5-20%.
Direct Goods can be much more difficult to procure through a marketplace. Standard direct items such as nuts and bolts are easily purchased through a marketplace. Configurable items are much more difficult to purchase through and marketplace and most content management companies are staying away from this market at this moment.
e-Procurement platforms include Ariba, Oracle, CommerceOne, and i2.
ERP (Enterprise Resource Planning)
ERP Definition (3rd party)
Inventory Carrying Costs associated with carrying inventory include:
Interest on Capital Costs – this is the largest component of carrying cost and is associated with money tied up.
Taxes & Insurance – insurance and taxes has to be paid on the current inventory.
Obsolescence & Depreciation – inventory obsolescence is a major issue with products with a short shelf life or lose value over time (computer products). Companies involved with products that become obsolete quickly should be focusing on decreasing cycle times.
Storage – the cost associated with having a facility to hold the inventory.
Opportunity Cost – what could the capital be used for that is tied up in inventory.
Costs of running out of inventory:
Loss of customer/sale
Disruption in supply chain
INVENTORY CARRYING/HOLDING COST
Carrying Cost = (Price per unit * Carrying cost percentage * Order Quantity in Units)/2
Average Inventory = EOQ/2 + safety stock
ECONOMIC ORDER QUANTITY
Reorder point = Estimated Demand * Lead Time
Inventory Control Websites
Inventory Control Systems
Managing Independent Inventory
Management of Inventory
Mysterious Cost of Carrying Inventory
Stock Control Mathematics
Total Cost of Procurement Estimator
Total Ownership Cost of Inventory
Kanban – an Integrated JIT system
Kanban – University of Cambridge
Transportation and logistics cost; closeness to markets
Utilities such as sewers, water, gas and electricity
Access to vendors and materials
Access to customers
Attitudes within the community
Incentives from the community
Proximity to freeway/railroad/ocean/airport
MASTER PRODUCTION SCHEDULE
Master Production Schedule Detailed Information
MIDDLE WARE (E-BUSINESS)
Middle Ware – also called B2Bi (business integration) this product allows integration not only internally but also from buyer to supplier. This process significantly enhances communication between buyer and supplier allowing better visibility through out the supply chain.
EAI (Enterprise Application Integration) – integrating systems in house.
Adapters/Connectors – the plug and play functionality of a B2Bi system to another technology platform such as Oracle, Ariba or CommerceOne. Adapters/Connectors should significantly decrease the implementation time of the product and make the entire implementation much smoother.
Middle Ware companies include webMethods, Tibco, Vignette, Extricity, CommerceQuest and FrontStep.
MONTE CARLO SIMULATION
Monte Carlo Simulation
Advantages to Outsourcing
More flexibility with manufacturing and capacity.
Lower labor costs
Capital does not need to be invested in machinery or plant capacity
Not a core competency so outsource it
Why People Don’t Outsource
Loss of control over the process. It is imperative to choose the correct outsourcing partner and to form contractual arrangements to ensure appropriate delivery and lead times.
Afraid of outsourcing competitive advantage. IBM outsourced both the microchip (Intel) and the operating system (Microsoft).
Partnering with wrong supplier.
Costs are not justified
Company wants to vertically integrate
Does not understand the benefits of outsourcing
The simplest way to describe the Pareto rule is 80/20. For example, 80% of a companies profits will generally come from 20% of the customers. If this is true, then 20% of the valued customers should receive 80% of the service. Many times however, 80% of the service goes to 20% of the bad customers.
Waiting as long as possible to put the finishing touches on a product. For example: HP would wait to put in its power cord until it knew if it was being sold in the US or abroad. The US uses 110 and most other countries use 220.
Process mapping – builds a flow chart of the process being analyzed in order to standardize or find areas of improvement. The primary information in the flow chart is each step in the process and the amount of time consumed in each step. Once the flow chart is complete, the process can be analyze by the process time and value added activities. Start with the longest process time. Begin by asking questions why it takes so long and where in the process can steps be taken out in order to decrease this time. Do this with each step in the process. While analyzing the process time manager’s would most likely be concerned with value added activities in order to decrease the process times. Be sure to look for duplicate transactions, unnecessary steps, and anything adding little value.
Continuous improvement in order to reach superior quality should be the goal of every company. Quality helps to lower cost and is one of the primary factors in the purchase making decision. The level of quality also distinguishes a company’s product/service. A high quality product can command a high price where a low quality product will have a less expensive price tag.
Quality in manufacturing is generally measured by the number of defects compared to the output. When there is a defect in a product there are many costs that come with it including: rework, waste, labor usage, late deliveries and poor customer service.
Quality of the product is located in the:
Costs associated with poor quality:
Poor customer service
There are three gurus of quality that will most likely be mentioned during quality discussions. They include Dr. Edward Deming, Dr. Joseph Juran and Philip Crosby.
Deming’s 14 Points
Six Sigma Discussion
SCOR (SUPPLY CHAIN OPERATIONS REFERENCE model)
A methodology for supply chain improvement developed by the Supply-Chain Council.
PLAN -> SOURCE -> MAKE -> DELIVER -> RETURN
SCOR model overview
What is Six Sigma
Six Sigma Calculator
Six Sigma Quick Reference
STRATEGIC COST MANAGEMENT
Strategic Cost Management contains supply chain analysis, strategic positioning analysis and cost driver analysis. By evaluating each of these three and manager will be able to better manage and understand costs.
Supply Chain Analysis – management of the flow of information and products from earliest supplier to the ultimate consumer. This also includes the disposal of the product.
Strategic Positioning Analysis – what is the value proposition of the company: cost leadership, innovation, niche, speed, etc.
Cost Driver Analysis – what processes or transactions create costs in the supply chain.
Can a less expensive material/components be used while maintaining quality?
Are the costs reasonable?
Is a standard item in the market a suitable substitute?
Can the weight of the item be reduced?
Can the packaging be redesigned to reduce costs?
Are the correct costs being allocated to the project?
Have the correct activity based costing methods been used?
Is the product over engineered? Could a lower quality product be substituted?
Are other suppliers making a comparable product?
Which costs are necessary?
Procurement and Sourcing Strategy Development
Supplier Management – managing suppliers in order to reduce overall cost. Suppliers must be separated by the number of purchases (one time buy vs. ongoing) and the relationship wanted with the supplier (from strategic to distant relationship.
Supplier management also includes supply base reduction. Most companies deal with more suppliers than needed. By decreasing the supply base, a company can leverage its spend with fewer suppliers, therefore, getting better overall prices. Fewer suppliers also mean better relationships with your key suppliers.
Are All Your Trading Partners Worth It?
Supplier Management Questions
Supplier Management and Development
Supplier Evaluation and Selection
There are various descriptions of supply chain management. Two that are commonly used are “cradle to grave” and “dirt to dirt.” The supply chain starts from the origin of the raw material and ends once the product has been discarded or recycled.
Getting the right product, to the right place, in the right quantity, with the right quality, at the right cost.
The primary decisions made within the supply chain include:
Location of production (domestic, international)
Make vs. Buy
Capacity of plants
Quality of the product (low cost leader, differentiation strategy)
Some of the objectives of a supply chain manager include:
Increase communication along all nodes of the supply chain to create an uninterrupted flow of materials.
Decrease inventory while still maintaining high customer service levels.
Reduce the supplier base and develop supplier relationships in order to reduce overall costs.
Standardize parts as much as possible in order to reduce the amount of inventory needed to be carried.
An Introduction to Supply Chain Management – Penn State
Principles of Supply Chain Management – techexchange.com
Supply Chain Introduction
What XML Will Do For Supply Chain Management – DM Review
Target costing is a methodology of costing new products. The target cost is derived by subtracting the desired profit from the market price (Target cost = market price – desired profit).
Target Cost Workshop
TOTAL COST OF OWNERSHIP
Total Cost of Ownership – the cost of the product starting from the initial planning stage to the ultimate disposal of the product. Example: the total cost of a vehicle begins during the search while visiting various websites and car dealers. The purchase of the vehicle is where most people believe the majority of the cost lies. This isn’t necessarily true. The total cost of the vehicle also includes insurance premiums, gas mileage, maintenance problems etc.
Total Cost of Ownership
Determing Your PC’s TCO – a brief paper on the TCO of computers.
Value add refers to the added benefit a service or product provides. Non-value added refers to an activity performed by a company that does not enhance the value of the product produced. One of the primary responsibilities of a supply chain manager is to take out all non-value added activities.
Reducing variability is one of the most important aspects of supply chain management. Variability refers to the uncertainty in a supply chain. A classic example of jargon used by a supply chain consultant would be: “In order to reduce the variability in the supply chain we need to increase the visibility.”
For example, many vendors supplying product to retail stores have a great amount of variability when it comes to demand forecasts. In order to reduce this variability a retail store can send real time data from the check out register directly to the supplier. This enables the vendors to better manage their supply chain and passing on the cost savings to the customer.
Increase visibility, Reduce variability. These two activities encompass all layers of supply chain management. I believe this motto should be engrained into every supply chain manager’s thinking. Let me know what you think.
VENDOR MANAGED INVENTORY
The primary benefits of VMI are inventory and stock out reductions.
VMI Definition and More
Supply chain visibility is terminology that will be used significantly among consultants. Basically, this is saying to increase communication among the different nodes in the supply chain. This will enable a company to better understand what is going on throughout the supply chain. By increasing visibility, you reduce variability, which will improve overall operations of the company.
Supply Chain Visibility Boosts Bottom Line
XML – an extensible mark up language providing a flexible way to share information through the world wide web and intranets. XML allows users to form their own language using meta tags. HTML is the language that is used on the web. Many people predict that XML will take over HTML as the main language used to produce web pages. A new language, XHTML is out in order to bridge the gap between HTML and XML. The difference between HTML and XML is that HTML describes what the words look like and XML describes what the words are.
What is XML?
Ok, So What is This XML Thing?
WAREHOUSE MANAGEMENT SYSTEM
There are two main types of websites: informational and e-commerce. SupplyChainToday.com is an informational based website. A website that exchanges goods for funds is an e-commerce website.
I encourage small businesses who outsource informational based websites to consider bringing it in-house. This is for information websites, not e-commerce websites. E-commerce websites are much more difficult to maintain. If the company website is going to cost more than $1,000 definitely look into building the site in-house. If you do not know much about web development I would be happy to give a training session in front page.
Computer Terminology (3rd party)
Terminology Generator (3rd party site)