A Non-traditional View of Operational Costs

Going beyond traditional financial metrics to measure supply chains


Even if the costs are in line with the industry, there's an opportunity to examine these individual costs to determine if they represent the best balance between manual and automated processes.

Another way to find opportunity is to look at each cost gap and ask, Why am I low in this cost? Is that necessarily a good thing? How is this potentially impacting my level of on-time delivery and customer satisfaction?

The pharmaceutical company's managers planning and other deficiencies led them to fix one metric at the expense of another. Once they recognized this, they took a more holistic approach and identified improvement opportunities that wouldn't penalize any one area it its business.

Improve the Supply Chain

Companies may want to consider initiating a full supply chain optimization project to determine why they are out of alignment in these costs and where best practices should be applied. This can be done in a single area, such as procurement, or a broader approach to span an entire supply chain.

The Total Supply Chain Management Cost metric results may provide the rationale to convince upper management that a full examination would identify gaps with the most revenue potential. The Supply-Chain Council's SCOR model allows companies to examine and measure their supply chain processes, determine where weak links exist and identify how to make improvements. This approach can provide a comprehensive view of supply chain operations and includes a way to examine material flow and work and information flow to determine performance gaps for improvement.

Traditional financial metrics are critical to understanding business performance, but they may not provide enough direction when it comes to identifying improvement opportunities and competitive performance gaps. A metric such as total supply chain management cost can help solve this problem.

About the Author: Dan Swartwood is a senior consultant with PRAGMATEK Consulting Group in Minnesota. He may be reached at dan.swartwood@pragmatek.com.

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