The concept of total cost has been around for several decades, but receives little attention from most inbound logistics strategies. While many companies are turning attention to supply chain management, too often they are leaving their own houses in disarray by not properly organizing the work of inbound logistics. After all, you must walk before you can run. Lean theory fully embraces the concept of systems thinking and total cost. A typical inbound logistics process will have the following activities and cost drivers:
- Parts ordering and supplier management
- Receiving and material handling
- Inventory management and associated carrying costs
In an effort to manage total cost, the logistics professional must understand how the inbound logistics process and their associated costs interact. The goal is to optimize the entire system, not a single activity. As we engage in total cost analysis, we will develop a list of questions, including:
- What are our major purchasing policies relative to purchased lot size?
- Do we wait for truckload quantities from suppliers or do we make multiple daily deliveries?
- Are the purchasing discounts and incentives designed to motivate large shipments resulting in high inventory levels?
- What are the transportation strategies?
- Are we minimizing transportation cost relative only to transportation cost or do we consider warehousing and inventory carrying costs when making transportation decisions?
- Do we calculate inventory carrying costs?
- Are these costs visible?
- Are they captured on our financial statements?
- What is the relationship between inventory carrying costs, ordering policies, transportation, and warehousing?
Answering these questions begins the journey of managing total cost within inbound logistics. Challenge rests with understanding how the activities and associated costs interact. To overcome this challenge, and to embrace total cost as a strategy, we must understand the concept of systems thinking and the trade-offs inherent among the logistics activities. A word of caution, however: it will be neither simple nor trouble free. One roadblock is invisible inbound logistics costs. This is because some costs are explicit and others are implicit. The explicit costs such as those associated with transportation and warehousing are easy enough to tabulate, particularly if a company hires out for these services (simply add up the bills!). Inventory carrying costs and the costs of poor service are typically opportunity costs, however. These implicit, intangible costs can be substantial and must be articulated and measured.
Determining costs on a customer-by-customer basis for segment profitability analysis can also be challenging. Activity-based costing can be helpful to this end. Though it remains a subjective basis for allocating costs, activity-based costing runs away from averages and other arbitrary bases for allocation.
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Posted by LeanCor Supply Chain Group
LeanCor Supply Chain Group is a trusted supply chain partner that specializes in lean principles to deliver operational improvement. LeanCor’s three integrated divisions – LeanCor Training and Education, LeanCor Consulting, and LeanCor Logistics – help organizations eliminate waste, drive down costs, and build a culture of continuous improvement.Facebook LinkedIn Twitter Google+