Performance Measures for Supply Chain Management (back to catalog)

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...In capital-intensive industries such as semiconductors or oil and gas, the production facility is very expensive. The cost of raw materials may be relatively low, and the cost of finished goods typically includes an allocation for use of the expensive capacity. Consider the following example:

Unit raw material cost: $1.00
+ Allocation for production capacity use:8 $9.00
Fully-allocated cost per unit: $10.00

Here the accountants would say the cost of a unit of finished goods is $10.00. Their job is to allocate all costs using generally accepted accounting principles (GAAP), but as important as GAAP is for accounting, it doesn't always contribute to good management decision-making. Suppose you found a way to reduce your finished goods inventory by 100,000 units, for example by using a faster delivery mode to your customers. Using the $10/unit standard cost valuation, you might think that you would be saving $1 Million. But think about it for a moment: if you reduced finished goods inventory by that many units, what would you really save in cash? Select your answer below:

Choice Answer
$1 Million



8 Obtained by dividing the amortized cost of the plant by the number of units produced in a year, for example.


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Title: Performance Measures for Supply Chain Management

4.3 / 5  (1199 ratings)

Total Reading Time: Approx. 1 - 2 hours (for average readers)

Word Count: Approx. 11,000 words


Certificate: Counts toward Fundamentals of Supply Chain Management

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  1. Introduction
  2. Alignment of Metrics with Business Strategy
  3. Service Metrics - Build-to-Stock
  4. Service Metrics - Build-to-Stock (continued)
  5. Service Metrics - Build-to-Order
  6. Inventory Metrics
  7. Speed Metrics
  8. Financial Metrics
  9. Bullwhip Metric
  10. "Bad" Metrics
  11. Applying Metrics Across the Entire Supply Chain
  12. Conclusions
  13. Test Your Knowledge
  14. Feedback
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