What Costs Go Into Supply Chain Management?

Supply Chain Management (SCM) is an important component of any business. It ensures that products are delivered to customers in the most cost-effective manner possible, while also allowing them to be as high quality as possible.

SCM is not just about shipping products; it also involves many other areas, and consequently, costs. Supply chain managers then need to understand what costs go into SCM, so they can make efforts to reduce them and set their company up for higher revenue and growth.

Successful supply chain management strategies can help a business achieve its goals, reduce costs, and improve efficiency.

In this article, we’ll cover the types of costs in supply chain management, how they affect your company’s bottom line, and how freight management software can help reduce those costs accordingly.

Types of Costs in Supply Chain Management

Traditionally, supply chain management is considered a cost centre.

In today’s modern world, supply chain management is an investment. Efficient and optimised management of supply chain operations can help reduce costs and drive stronger cash flow.

But as an investment, supply chain management inevitably drives cost. The cost of buying materials and services to get your products to your customers or end users is what drives supply chain costs.

But what particularly are these types of costs in supply chain management? Let’s take a look at the top drivers of cost in supply chain management.

Procurement Costs

Procurement costs refer to the expenses related to buying materials or products from different sources, which may include agents, wholesale sellers, or manufacturers.

Procurement costs include:

  • the cost of materials and services you purchase
  • the cost of purchase order processing, which is associated with procuring a product or service. Purchase order processing costs are incurred when you order, receive, and process the items. It also includes other relevant activities, such as resubmitting an earlier invoice if changes or updates are necessary.

Transportation Costs

Transportation costs are composed of the associated expenses for the movement of materials, goods, or manpower from one location to another by using carriers. These charges depend on various factors, such as the distance covered and total shipment weight.

These charges can be broken down into three categories:

  • Vehicle or other types of transport
  • Fuel
  • Any taxes or tolls that apply

Production Costs

Production costs are the expenses incurred to manufacture goods or services so that they can be offered in the market. This type of cost may be divided into direct and indirect production costs.

Direct Production Costs:

  • Material Costs — The price of raw materials used to make your products or provide your services, including those that go into your product (e.g., steel).
  • Labour Costs — These represent the total expenses covering the wages of employees, plus their benefits and taxes.

Indirect production costs are expenses that are not directly related to manufacturing a product or service. These can include a business’s utilities, machine maintenance, and cleaning supplies.

Quality Costs

Quality costs are those associated with quality issues, and they can have a significant impact on your company’s bottom line. Quality costs may include warranty expenses, lost sales due to poor-quality products, or product returns.

To calculate the cost of poor quality, determining the available information about each item in your supply chain is crucial. Information like production dates/time stamps and location of inspection, if applicable.

Inventory Costs

Inventory costs are the expenses associated with ordering and holding inventory. These include the cost of storage, insurance, and obsolescence, as well as the cost of holding and storing unsold products and any related paperwork.

The faster your products get sold, the more profit you make. The longer stock stays in your physical space, the higher your inventory costs will be.

Inventory management can help reduce inventory costs by improving your demand forecasting to determine the products that need replacing or restocking, or using just-in-time (JIT) methods that reduce the number of materials or goods ordered at one time.

Key Cost Reduction Strategies in Supply Chain Management

The ultimate purpose of SCM cost reduction strategies is to decrease expenses and increase profits, while also improving productivity and creating a more robust and efficient supply chain.

To reduce types of costs in supply chain management, here are some of the top cost reduction strategies you can adopt.

Supply Chain Cost Modelling

Supply chain cost modelling is an important tool that helps businesses understand the costs of their supply chain.

Supply chain cost modelling provides insights into business performance. It can aid managers and executives in forming strategic and data-driven decisions about where to direct resources.

By understanding how much money you spend on certain activities in your supply chain, you can better determine whether those investments are worthwhile or not. And if so, why? This will allow you to make better decisions about the allocation of scarce capital resources over time via different channels.

Supply Chain Management Cost Analysis

Supply chain management cost analysis involves identifying the key cost drivers within your supply chain and understanding how they affect your operations. It can be performed as a cost estimation strategy for better visibility of the true cost incurred by the business.

A business can use the data and insights gathered from cost analysis to negotiate better prices and source the best suppliers. Supply chain management cost analysis also allows businesses to reduce costs by optimising their processes, improving inventory management, and reducing transportation costs, among others.

How Freight Management Software Can Help Reduce Supply Chain Management Costs

Freight management software offers amazing benefits to businesses and companies around the world.

By streamlining logistics operations and eliminating redundant processes, integrating freight management software in your supply chain can result in higher productivity and decreased expenses allocated to several areas, including labour and transportation.

Freight management software also helps to improve communication between shippers and carriers, negating the need for back-and-forth phone calls or lengthy emails that could potentially lead to misunderstandings or lengthy delays.

Further, real-time tracking information allows managers to stay informed at all stages of the shipping process. Advanced reporting tools provide insight into overall costs, allowing for quick implementation of necessary changes.

The cost savings offered by freight management software are considerable and can help to take the pressure off strained supply chain management budgets.

In short, freight management software is an invaluable tool that provides lasting value in terms of both money and time.

Cario Can Help Reduce Your Supply Chain Management Costs

Traditional supply chains use manual processes that are prone to human error, take too much time, and cost more money than expected.

Modern technology like Cario, on the other hand, automates your freight decisions. This means that you can compare multiple freight carriers, choose the right carrier each time, track all freight in one system, and gain insights into real-time freight data and analytics.

As a smart freight management software, Cario allows companies to eliminate mistakes, speed up shipments, reduce manpower requirements, and more effectively allocate resources.

With the right planning and insight, you can reduce supply chain management costs to maximise profits. Contact Cario today to learn more about it.