Supply Chain Cost Drivers: What You Don't Know Can Hurt You

The wastes that are part of lean thinking are well-documented, waste being defined as anything that doesn’t add value to the customer or that a customer would not be willing to pay for. The classic seven wastes in lean thinking include: unnecessary transport, inventory, wasted motion, waiting, overproduction, overprocessing and producing defective products/services. How do these wastes manifest themselves in the supply chain? What are the causes and effects? Who is responsible for them?

Much of the waste and cost in the supply chain is attributable to business practices and processes at both customers and their suppliers. For example, a customer firm’s frequent schedule changes may unintentionally cause a chain of events that increase waste in the supply chain. Frequent schedule and order changes, particularly those that are less than lead time, may compel a supplier to carry excess inventory, may cause shortages and increase lead times as the supplier scrambles to cope with unexpected changes. The effects can become magnified and create a self-induced volatility. Schedule and order changes can increase overall cycle times at both customer and supplier, with the customer ordering earlier because of increased purchased part lead times, while continually making changes mid-cycle and keeping just-in-case inventory of its own. The situation can snowball into shortages, expediting and increasingly longer lead times. Supplier quality problems can create other cost drivers ranging from rework, shortages, and expediting at both customers and suppliers, as well as warranty returns, customer complaints and increased volume at call centers.

You need to find these cost drivers in order to eliminate them. Management typically pays more attention to visible costs than invisible costs, even though the latter are quite real, often risky, and are robbing the bottom line like invisible bandits. While no business likes rework, returns and complaints, firms continue to do things as they’ve always done them and institutionalize these invisible costs as a part of doing business. They may address them every so often, but the gremlins of the status quo always manage to put things back to the way they were before.

Next: Addressing hidden supply chain cost drivers

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