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The True Cost of Supply Chain Decisions

Authored on: Jun 18, 2007

Technical Paper

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Continual cost cutting and greater financial responsibility is the pressure that today's organizations are under—so much so that they may inadvertently reverse the effectiveness of their supply chain, which increases costs and waste instead of profitability. There exists a very real financial stress caused by corporate objectives and Wall Street expectations when a company goes public, at which time costs, gross margins, and quarterly profit and loss reporting become the dominant decision-making influencers. All too often, this financial responsibility stress forces organizations to operate based on their legacy sourcing decisions, where the cost of a unit is the dominant factor in product selection. For these organizations, the act of cost-cutting becomes the prime metric for determining their supply chain's effectiveness.

While this strategy is certainly a popular one across many industries, it is not necessarily what is best for the organization, nor for their customers. This strategy makes the supply chain function more of a transactional process that is measured on a per-unit basis, versus a strategic process where the impact throughout the entire supply chain is considered. If suppliers and customers fail to work together to find an optimal balance, then cost, reliability, customer satisfaction, profitability, and continued technology advancements cannot exist in harmony.

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