HomeOpinion & AnalysisColumnistsIs your supply chain financially sound?

Is your supply chain financially sound?

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One of my previous articles explored non-financial measures, one of two quantitative metrics of supply chain performance.

Financial measures are meant to assess if organisational goals that include revenue maximisation — which requires minimisation of supply chain costs — are being achieved.

Supply chain costs include several fixed and operational costs. Such costs arise due to inventories, transportation, facilities, operations, technology and labour.

Typically, the financial performance indices can be put together using the following major modules — activity-based costing, inventory costing, transportation costing and intercompany financial transactions.

Financial performance can be evaluated by looking into the following aspects of the supply chain:
Cost of raw materials: An evaluation of how well your procurement is performing.

Commodity price index and baseline price are the effective measures of price competitiveness. Some organisations evaluate cost of raw materials using the three quotes system which sometimes is not effective if selection of suppliers is not competitive.

The best in class would not be representative of the best on the market. Use of information technology can assist in such an evaluation.

Activity-based costs: Assesses supply chain processes such as material handling, manufacturing, assembling, etc. The evaluation seeks to assign organisation resources costs through activities and services provided to the customers.

An evaluation is done on the assignment of indirect costs (overheads) into direct costs compared to conventional costing models to ascertain the effectiveness of processes.

Inventory holding costs: Evaluates to assess the effectiveness of systems. High-performing supply chains achieve high customer satisfaction levels with minimum stockholding.

This is achieved by application of world-class techniques such as framework contracts, consignment stock arrangements and blanket orders, just-in-time philosophy that seek to reduce the level of stockholding at the same time improving availability of products and services to customers.

This measure is only achievable if an organisation regards its supplies function as strategic, being able to attract the right skills to add value to the business.

Logistics costs: Supply chain performance can also be assessed using the transportation costs. Products need to reach the customers and an organisational ability to move bulk reduces transport costs.

This is also a factor of apt choice of transport mode that varies from rail, road, sea and air. Transport costs can also be a factor of multiple and frequent small order deliveries compared to less frequent bulk deliveries.

Inventory loss: Measures the cost of damages and expiries. Some stocks have short shelf life like perishables and some lose potency due to poor handling as in the case of vegetables and medicines respectively.

Ineffective systems account for huge losses as a result of poor planning and material handling. Inventory planning would need to balance product shelf life, transport costs and desired level of service.

The value of returns: Measures the cost of returns from customers. These can be measured by the rate of credits passed in relation to sales.

It can also be factor of the evaluation of costs of goods returned by the customer against volume of sales.

Liquidated damages: Suppliers can be penalised for late deliveries and incorrectly filled orders. Buyers can claim liquidated damages when the contract provided for penalty on delivery delays.

Many organisations have not been paying much attention to performance indicators of their supply chains.

By closely looking at such costs, decision makers will start appreciating that procurement and stores activities are critical and hence require the right level of skills and qualifications, at the same time, being positioned at the appropriate organisational level.

Proper action is required to correct any supply chain challenges for business to be viable.

Nyasha Chizu is a fellow of CIPS and the CIPS Zimbabwe branch chairman writing in his personal capacity.

Email: chizunyasha@yahoo.com

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