Performance Measures for Supply Chain Management

Performance Measures for Supply Chain Management (back to catalog)

...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 $100,000 $10,000 $0

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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SCM105 Specifications

Title: Performance Measures for Supply Chain Management

Rating:

4.3 / 5 (1169 ratings)

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

Word Count: Approx. 11,000 words

Author: Dr. Warren H. Hausman
Professor of Management Science & Engineering, Stanford University

Certificate: Counts toward Fundamentals of Supply Chain Management

Datasheet: Download

Contents

Introduction
Alignment of Metrics with Business Strategy
Service Metrics - Build-to-Stock
Service Metrics - Build-to-Stock (continued)
Service Metrics - Build-to-Order
Inventory Metrics
Speed Metrics
Financial Metrics
Bullwhip Metric
"Bad" Metrics
Applying Metrics Across the Entire Supply Chain
Conclusions
Test Your Knowledge
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