Supply Chain Decisions - Make Sure You Understand the Dollars and Sense
Part Two: The Impact on Real Costs
Jim Brown - July 22, 2003

Analyzing the Real Costs

Most supply chain optimization models focus on optimizing supply chain. Frequently, though, the costs used in supply chain models are standard costs, averaged costs or ''cost penalties''. While these costs act as good guidelines for tactical decisions, they are not appropriate for strategic decisions because they often lead to incorrect conclusions. There is an inherent challenge in that high-level strategic decisions often have multiple, cascading cost impacts. The reaction of the costs to changes in the supply chain system is not predictable in a simple relationship that is based on current standard costs, because strategic changes often involve step changes in costs that alter the balance of fixed and variable costs...