In this episode of Chain Reaction Tony Hines discusses cost concepts that are essential to understand for those managing supply chains. Sources of value and cost in the supply chain and the wider system are examined in the discussions. To achieve supply chain advantage you must understand cost and value. Some of the most important things to understand about costs are direct costs related to the products or activities undertaken and costs that are related to time. Cost elements are materials, labor and overheads. Risk costs, Cycle Time Costs, Conversion Cost, Non-Value Added Cost and Supply Network Cost are all necessary to control value streams. It is essential that every business understands cost concepts and how they impact the supply chain . Value is created by activities but which activities are creating value and which create cost. Do you know the difference between cost, value and profit? Do you know which costs are related to time or products? Know why this is necessary. Do you know which costs contribute to the profitability of the supply chain? Listen and find out more.
Value added is another important concept that all businesses need to be aware of. Identifying sources of value and cost is an important supply chain management issue. The difference between input costs and output costs is a measure of value added. Do you know the difference between cost and investment? It is a distinction that should be made carefully. You invest capital to capture future revenue with the investments made.
The Total Cost of Ownership is another financial concept that all supply chain professionals should have some understanding of. The purchase price of an item is one element of the cost of ownership. There are three elements of cost in TCO which are pre-ownership cost, acquisition cost and post ownership cost. These are examined in the context of supply chains.
Kaizen is briefly discussed in the context of cost in supply chains. Wastage is one of the biggest costs in any supply chain – Mura, Muri and Muda.