JDA: Intangible Costs in Supply Chain Managment

Over the last decade, many companies adopted outsourcing as a strategy to take advantage of lower manufacturing costs in places like China and Korea. More recently, they have been embracing “right-shoring” as a flexible strategy for the ongoing challenging economic landscape.

And while both strategies can equate to cost savings, the common focus among many companies is solely on the cost of manufacturing an item. Leading retailers understand that the focus has shifted from gross profit to net profit as businesses and technologies become more sophisticated.

Companies have started to capture fuel, transportation, customs, freight, handling, storage and other related charges to determine the total landed cost of an item to its final destination – the retail store. While many companies leverage this information to better understand the value of a product, today’s successful retailers are also factoring in the intangible costs to determine net profit.

Wayne Usie, JDA Software’s senior VP, retail, examines the importance of considering and leveraging intangible costs such as overstocks, sourcing strategies and flowpath when making critical supply chain decisions.

Overstocks: The average lead time to receive goods from China is about 16 weeks. As a result, orders are placed months in advance of knowing what the true product demand will be. While sophisticated tools and technology can create demand plans based on historical, point-of-sale and basket-level data, occasional overstocks are unavoidable with such long lead times.

However, businesses with more agile supply chains that can react to real-time shifts in demand are less likely to have excess inventory sitting in warehouses or on store shelves.

Retailers that have visibility into an item’s cost structure are able to make informed decisions when an item is overstocked to determine whether promoting the item, reducing the price, or increasing distribution will most favorably impact profit and margin.

Local versus global sourcing strategies: Retailers must be conscious of the benefits and disadvantages of both local and global sourcing decisions to ensure that quality control is maintained and that products are adequately represented by the retail price and brand image.

An item may cost four dollars to manufacture in the US or Mexico and only two dollars in China, but that price differential can quickly diminish when factoring in higher transportation costs and increased product returns due to sub-standard product quality.

Additionally, sourcing from locations further away typically increases a product’s lead time, as well as makes it more difficult for retailers to react to demand changes and out-of-stock situations.

Flowpath: The flowpath of a product is often overlooked when retailers determine sourcing strategies and plans. While reducing business expenses really resonates with companies, analyzing and calculating the distance, time and most cost-effective method of shipping products to consumers can be rather daunting. The most economical flowpath considers what expenses will be incurred and how they affect the total cost of the product.

Taking transportation costs into consideration with all other captured expenses can enable companies to achieve a clear view of an item’s overall net profitability.

As retailers make strides to thrive in an escalating competitive environment with increasingly discerning customers, focusing on net profits with a clear understating of intangible costs is crucial. Thorough visibility into the true cost of an item – from raw materials to the store shelf – is key to making informed supply chain decisions.

JDA, www.jda.com