Supply Chain and Cost Perspective

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1. Introduction

This paper examines Supply Chain from a cost perspective. Economists, executives, and scholars discuss Supply Chain broadly and at length. Traditionally, the scope of Supply Chain was limited to examining manufacturing. Because Supply Chain paradigms used manufacturing as the focus, Supply Chain theories were about the production of manufactured finished goods. Globalization of international trade has changed and complicated not only the locations and materials of production, but also the culture of production. According to Janvier-James, A. M. (2011) the current international marketplace demands a complex examination of Supply Chain.

2. Definition of Supply Chain and Supply Chain Management

2.1 Supply Chain

Supply Chain definitions vary, however many scholars still utilize narrow parameters. Janvier-James, A. M. (2011) offers a variety of definitions including Supply Chain as the process by which raw materials become finished goods delivered to consumers. Definitions that are more elaborate discuss the origin and destination of finished goods as fundamental to understanding Supply Chain. The point of origin is usually the location of raw materials in some form. Notions of function and third party activities add a set of entities to the definition of Supply Chain by accounting for transportation, suppliers, producers, contractors, distributors, retailers, information technology personnel, and the deliverers of finished goods.

2.2 Supply Chain Management Definition

Two basic concepts infuse definitions of Supply Chain Management. The process by which finished goods arrive in the hands of consumers is a result of an actively managed network. Supply Chain Management works to capitalize on consumer satisfaction while maintaining best practices related to cost. The cost perspective is vital to defining and structuring Supply Chain Management. Effective networks are not accidental. They are a result of careful and correct Supply Chain Management. Supply Chain Management, for example, arranges transport that causes cost savings as well consumer satisfaction. Janvier-James, A. M. (2011) asserts that Supply Chain Management must increase the value of the finished product, thereby increasing consumer satisfaction while simultaneously adjusting the operating costs of the Supply Chain.

Janvier-James, A. M. (2011) summarizes correct costing and best practices as a Supply Chain that completes the correct finished product, created in and delivered to the correct location, in the correct quantity, at the correct time, and does so at appropriate cost. Two requisites of effective Supply Chain Management are reliability and flexibility. Cost remains fundamental; however, modern Supply Chain Management paradigms focus not only on cost but also on consumer satisfaction. For example, if speed of delivery is a factor then it follows that Supply Chain Management will add delivery costs to the bottom line of producing specific finished goods. If speed of delivery does not increase consumer satisfaction then it is not part of the calculation.

3. Categorization of Costs

3.1. Customer Service

According to O'Byrne, R. (2011) costs should correlate with increased consumer satisfaction. Supply Chain Management should not allocate costs to services that consumers do not view as valuable. For example, Supply Chain Management should examine transportation costs and cut costs where the consumer does not perceive speedy transportation as beneficial. O’Byrne warns Supply Chain Management to avoid over-servicing consumers. Consumers plan their budgets in order to accommodate additional costs to procure finished goods in the manner that will increase consumer satisfaction.

3.2 Supply Chain Strategy

Supply Chain strategy shares the goal of correct costing with Supply Chain Management. Additionally, Supply Chain strategy defines elements required in order to be competitive. Supply Chain strategy evaluates the costs and compromises needed throughout the Supply Chain. Supply Chain Strategy determines corporate policy. Policy determines consumer service agreements. Supply Chain strategy coalesces with Janvier-James discussion of the Supply Chain as organic. The life cycle of finished goods requires through examination be those goods information, service, or currency. When strategies and polices are established correctly the cost of operations secures cost savings.

3.3 Sales and Operations Planning

The Sales and Operations Planning processes dictate the most advantageous manufacturing output. Supply Chain Management provides a thorough analysis of data including software considerations, labor costs, geography, facilities, and raw materials. Burrows, R. P. (2012) offers a coherent Sales and Operations Planning theory based on traditional economic theories such as supply and demand. Efficiency of production always accounts for the principle of consumer satisfaction.

Consumer satisfaction is an array of things such as perceived personal attention and dedicated finished goods. Analysts who rely upon market-driven paradigms perform Sales and Operations Planning in real time. For example, corporations increase consumer connectivity and reexamine outdated policies. This iterant process requires on-going analysis of operations. Cost-related Sales and Operations Planning processes provide accessibility to and delivery of finished goods at a cost savings.

3.4 Supply Chain network design

Watson, M. (2013) states that the Supply Chain network design determines whom and what will produce finished goods. Additionally, Supply Chain Management uses network models to make decisions about domestic production and outsourced production.

3.5 Outsourcing

O'Byrne, R. (2011) portrays Third Party Logistics as the linchpins of outsourcing models. Correct management of Third Party Logistics reduces the costs and increases the function of the Supply Chain. Outsourcing is complicated. Efficient handling of Third Party Logistics requires understanding and analysis of not only the economics involved but also expertise. Warehousing and transportation of finished goods are commonly outsourced because managers assume there will be an automatic cost savings. Cost savings will only occur if the third party is more capable and competent than the corporation in handling a specific point in the Supply Chain. Cost savings means correct comparison between the third party and the corporation.

3.6 Asset utilization

Context is vital to developing strategies for asset utilization according to Sehgal (2011). Corporations who invest in asset utilization so do because their Supply Chain strategy is to reduce costs. Two examples are Wal-Mart’s consumer centric strategy of being a price leader and CEMEX’s consumer centric strategy incorporates differentiation.

3.7 Performance Measurement

Shepherd, C., & Günter, H. (2006) explain performance measurement as part of the Supply Chain evaluation. Performance measurement is dynamic and criteria changes over time. Characteristics of performance measurement are maintenance, data collection, and evaluation. Key Performance Indicators analyze the Supply Chain and performance measurement compared to the corporation’s goals. Key Performance Indicators are of great consequence. Cost savings means that the Key Performance Indicators criterion incorporates current data and correct analysis.

4. Key costing by Supply Chain Management

4.1 Software

Eldridge, S., Balubaid, M., & Barber, K. D. (2006) published in the “International Journal of Quality & Reliability Management” about knowledge management approaches to quality costing. This approach uses software for correct costing. The data analyzed examines potential for incorrect costing. The authors offer up software as an efficient alternative to traditional quality costing methods. Software reduces the need for traditional methods of training and education.

Corporations that had control over the software developed traditionally proprietary software. The expansion of global marketplaces resulted in a demand for more generic software, which resulted in concerns over security.

Ngai, W. T. Eric, Cheng, T. C. Edwin, & Ho, S. S. M. (2009) conducted a survey of Web-based Supply Chain Management software and discovered five dimensions of the for Supply Chain Management Software. These authors list 1) communication, 2) top management commitment, 3) data security, 4) training and education, and 5) hardware and software reliability.

There exist major issues in using generic software to communicate through the Supply Chain. Security is a definite problem. Additionally costs can be prohibitive and add to the bottom line of the corporation and the third parties along the supply chain, both in terms of software, hardware, and personnel.

The successful implementation of software requires a considerable rise in costing for research and development as well as additional costs to ensure security.

4.2 Total Cost Ownership

The total cost of ownership model addresses the training and education of personnel involved with the Supply Chain, particularly those within the corporation who provide the finished product to the consumer.

4.3 Common Hard Savings

Typical to the discussion of cost of ownership is the examination of production and transaction costs, overhead, reduction in transportation costs, and reduction in personnel costs.

4.4 Common Soft Savings

Ferrin, B. G., & Plank, R. E. (2002) describe cost savings as typically occurring through acts such as acquiring raw material at a lower than usual cost, cost avoidance, saving costs via effective response to future higher costs, negotiations, substitution of lower cost units, and less packaging.

5. General Approach toward Supply Chain Cost Management

The network that effectively manages Supply Chain costs is one in which executives advocate for and maintain cost management. Additionally, a cost conscious culture must pervade all aspects of the corporation. Executive level decision makers need to allocate resources throughout the Supply Chain in order to uphold cost conscious processes. One approach is to invest in Supply Chain cost management experts who educate Supply Chain Management and accounting personnel about specific actions for best cost practices.

Ellram, L. M. (2002) recommends a team of employees accumulate and analyze data in order to assess cost changes over time. Supply Chain Management cooperates with like-minded suppliers who aim to decrease hard costs by increasing the use of digital data. Suppliers tend to be motivated to embrace and improve Supply Chain costs overall. Many consumers are price focused. However, others appreciate correct costing in order to improve consumer satisfaction.

6. Summary and Conclusion

Correct cost, speed, and consumer satisfaction are vital to an effective Supply Chain. Supply Chain Management needs to focus on cost savings as well as consumer expectations. It is important that Supply Chain Management examine the Supply Chain as a network that includes speed as a consideration but also understands that sometimes the costs expended on speed result in over-servicing. All aspects of the Supply Chain are important and an insignificant increase in consumer satisfaction will not offset increased costs. Sometimes speed of delivery is not the most effective way to correctly allocate Supply Chain costs.


Burrows, R. P. (2012). The market-driven Supply Chain a revolutionary model for Sales and Operations Planning in the new on-demand economy. New York, American Management Association.

Eldridge, S., Balubaid, M., & Barber, K. D. (2006). Using a knowledge management approach to support quality costing. International Journal of Quality & Reliability Management. 23, 81-101.

Ellram, L. M. (2002). Strategic cost management in the Supply Chain: a purchasing and supply management perspective. Tempe, AZ, CAPS Research.

Ferrin, B. G., & Plank, R. E. (2002). Total Cost of Ownership Models: An Exploratory Study. Journal of Supply Chain Management. 38, 18-29.

Janvier-James, A. M. (2011). A New Introduction to Supply Chains and Supply Chain Management: Definitions and Theories Perspective. International Business Research. 5, p194.

Ngai, W. T. Eric, Cheng, T. C. Edwin, & Ho, S. S. M. (2009). Critical success factors of web-based supply-chain management systems : An exploratory study. Production Planning & Control, Sep. 2004, V. 15, No. 6, P. 622-630. Taylor & Francis.

O'Byrne, R. (2011). 7 ways everyone can cut Supply Chain costs. Supply Chain Management's Supply Chain Quarterly. 5.

Sehgal, V. (2011). Supply chain as strategic asset the key to reaching business goals. Hoboken, N.J., Wiley.

Shepherd, C., & Günter, H. (2006). Measuring Supply Chain performance: current research and future directions. International Journal of Productivity and Performance Management. 55, 242-258.

Watson, M. (2013). Supply chain network design: applying optimization and analytics to the global Supply Chain. Upper Saddle River, N.J., FT Press.