Total Supply Chain Cost

Total supply chain cost is considered one of the most difficult metrics to track. However, the potential rewards for getting a firm grip on this metric within the Supply Chain Council's Supply Chain Operations Reference (SCOR) model are staggering.

"It is estimated that reducing the cost of your supply chain by 1 percent can be the equivalent of increasing revenues from 4 to 12 percent," says Scott Stevens, CTO for the council.

Total Supply Chain Cost measures all the costs associated with managing a supply chain. It includes the costs associated with acquiring and delivering material, planning and order management, but none of the expenditures associated with research and development or sales and marketing.

There are five specific cost buckets bundled into the metric:

• Material acquisition costs
• Order management costs
• Inventory carrying costs
• Information systems costs
• Finance and planning costs

The metric takes the sum of those costs and divides it by a company's revenue to arrive at a percentage that allows for comparisons—if the company can pull off the analysis. Says Stevens, "These numbers are difficult to capture for a number of reasons. In many cases they overlap, while in others they are hidden. Additionally, different functional organizations tend to report things differently. There are a lot of grey areas and it requires some effort to decide which costs go where, but it is huge in terms of its impact."