What are the Costs of Running a Supply Chain?
Many companies are unaware of the most pressing issues pertaining to supply chain management. As a result, they often adopt a supply chain approach that doesn’t match their market, their customers’ needs or their business philosophy. What are the main issues of managing a supply chain? More importantly, when businesses look to adopt a specific supply chain management approach, what are the essential criteria for success?
1. Start With Understanding the Real Inventory Costs
Inventory costs are much more than just paying for parts and raw materials. Included in inventory costs are the freight costs to get those parts in and out of the warehouse. There are other costs relating to how long inventory is held, and still other costs related to obsolete, slow moving, outdated and damaged inventory. The basic rule states that the longer inventory is held, the more expensive it becomes.
Freight costs to and from warehouse: Paying for freight from suppliers and out to customers is a direct cost of inventory.
Length of time inventory is held: Typical inventory holding costs are about 2% to 3% a month. Since inventory is often financed by business loans, this cost includes the daily cost of money.
Outdated and damaged inventory: The longer inventory is held, the more likely it risks becoming outdated and damaged. This is why it’s essential to liquidate slow moving stock.
2. Understand Different Types of Supply Chain Approaches
Before deciding upon a supply chain approach, it’s best to discuss the two main approaches available to businesses. One is the push-pull or JIT (Just in Time) inventory approach, while the other is the rolling forecast or Min/Max approach. Each has its merits and each has its drawbacks. In order to decide which one best suits a business, it requires a thorough understanding of the strategy behind the approach and a summary of both its benefits and drawbacks.