Supply Chain Management Impact on Cost

Introduction 

The concept of Supply Chain Management (SCM) concentrates on utilizing available resources and finances to maximize the value of customers and retain the competitive advantage against other competitors in the market. As a result, managers in the supply chain department has to be cost effective in their duty ( Christopher, 2016) . In business, supply chain management covers all the activities involved during production of goods from manufacturing to selling. The processes in between include purchasing of raw materials, manufacturing or outsourcing, distribution of products and finally storage of goods before sale. Managers in the supply chain department as a responsibility to ensure that minimum cost is incurred in all the process to maximize company’s profits. Therefore, SCM plays a vital role in the organization by regulating all costs of production to boost the profitability ratio of the company. 

In the real world of business, supply chain management does not only consist of the physical flow. Instead, information flows is also an important category of SCM. Most organization do not manufacture the products they use in their daily operation. There primarily depend on other companies to supply them with all they need. Therefore, there has to be some communication between the partners in order to achieve their goal ( Fawcett et al., 2014) . Exchange of information from one partner to the other until the products reach the final consumer refers to information supply chain management. Miscommunication within the flow may lead to losses or even unreliability in business. Managers make a decision on whether to outsource products depending on the marginal profit derived from manufacturing compared to that of purchasing. If the total cost of outsourcing is less than that of production, then the supply chain manager is more likely to recommend for purchasing from external manufacturers. 

Case Study: SCM Impact on Costs of XYZ Company 

XYZ Company is experiencing employee turnover where the former supply chain manager has to retire and a new vice president for the department is employed. The company manufactures products A, B, C among others during its production process. However, the company has been experiencing high cost of production and would like to reduce the total cost in order for it to maximize profits. As a result, the newly hired vice president needs to make critical decisions on where to outsource some components from. She must involve some arithmetic to determine the source that will supply the products at the lowest cost possible. In this paper, the product to be tackled is the one that is labeled “Product 2”. 

In the 21 st century, competition in the field of business in increasing without limits. Therefore, entrepreneurs have no option but to subsidize their prices and raise the quality of products. Such a scenario leads to consumers adding more on the unit cost of production. Many companies have now shifted from manufacturing to outsourcing their commodities with an aim of eliminating manufacturing expenses ( Stadtler, 2015) . XYZ Company would like to do the same and eliminate all the costs associated with manufacturing "Product 2" and get it at a lower price from another country. At times, the cost of sourcing goods may be a bit higher compared to that of manufacturing. Therefore, the manager supply chain manager has to liars with the finance department to work out the logarithms on management accounting. XYZ organization may opt to partner with the supplier so that the cost of importation may be cut. That means partners have to come up with an agreement where both of them end up in a win-win scenario. 

In this case, the newly employed vice president has to calculate the total cost of sourcing “Product 2” from two different countries for her to choose the best option. To begin with country A, the cost of the product is 2 Reds which is equivalent to $1. For flight purposes, a container will hold 1000 pieces on a trip. Therefore, for one container of product 2, it will cost; 

2*1000=2000 Reds, which is equivalent to $1000. 

After conversion, XYZ Company will incur a cost of $1000 to purchase product 2 from country A. However, an ocean flight cost must be added during the calculation of total cost. According to the information available, country A is located in Brisbane, Australia where the shipping cost from there to the USA is approximated to be $5000. Mathematically, the total cost for sourcing product 2 from a country will be; 

$6,000 ($1000 + 5000= $6000). 

For the vice president to make a decision, she must compare total costs of shipping from country A and country B. 

Due to the diversity of packaging between the two countries, the shipping terms are different. The distance covered from the sourcing countries to XYZ Company also matters. In this case, the cost of purchasing one piece of product 2 in country B is 2.2 Greens which is equivalent to $1. According to their shipping conditions, a container can only carry up to 800 pieces which will cost; 

800*2.2=1760 

After considering the conversion rates, the cost is equivalent to $800. The flight cost from the manufacturer located in Tokyo, Japan can be estimated to be $4400. Therefore, a total cost for shipping can be determined by adding up purchasing cost and flight cost that gives a total of; 

$800 +$4400= $5200. 

With the total cost of outsourcing product 2 from both countries, it is easy to determine where XYZ Company will save more money. If one trip of 800 pieces from country B costs $5200, then shipping 1000 pieces that are equivalent to one trip from country A will cost a total of $6500. 

$1000*$5200/$800= $6500. 

Importing the same number of pieces from country A is $6000. That means there is a difference of $500 between the two options. Since the company is aiming at saving money by reducing a cost of production, the vice president is more likely to go for the least cost. Sourcing product 2 from country A will save the company $500 for every trip they trip they order. 

Recommendations on which Country to Outsource Product 2 

When making the decision of where XYZ Company should order their commodities, a number of factors must be considered. The first thing to think of whether the company is offering the product with the correct specs. The sourcing company may consider doing some modification before delivering the goods to the final consumer. In the situation of XYZ Company, there is an assumption that both company A and B offer product 2 with same specs. The factors to consider are a price of the product as well as importation. Both factors add up to a total cost of sourcing that the vice president needs to account for both in the short-term and in the long-run. According to the calculations done above, the cost of outsourcing product 2 from country A is less compared to country B. Therefore, it is advisable to make choose country to be as the new partners in business. The decision will save the firm $500 per every trip, which amounts to $6000 every financial year. The amount saved is worth paying for another container from country A to XYZ Company. 

Assembling of Product 2 

When choosing a storage unit, supply chain managers have to consider a number of factors. All decisions in a business have to depend on cost saving since the end goal is to make a maximum profit ( Mangan, Lalwani and Lalwani, 2016) . The first thing to look at when choosing a warehouse location is the layout of the building. How the building is structured matters a lot. XYZ may decide to choose a specific location due to the nature of their operations during storage. For example, warehouses that were built a long time ago may fail to serve the purpose since the modern way of products flow has changed. The ceiling height in the modern warehouses has developed due to the use of technology when stocking the place. Therefore, it is advisable to check on the house layout and space before making a decision. 

Secondly, the vice president of supply chain management in XYZ Company should do a good research on the availability of skilled labor in the desired location. For example, if she decided to choose a remote area and use it as the preferred location, less money will be spent on hiring the premises. However, they will be no skilled labor around the place. She will have to hire people from far to come and work in the warehouse. A storage unit should be placed in a location where there is a high density of people. By so doing, labor availability will not be the reason as to why the organization is spending more than expected. 

The intensity of use also determines the location of the warehouse. Organizations that have a high flow of goods may need to place their storage unit within the central business district where customers can access the commodities easily ( Seuring and Goldbach, 2013) . The targeted place for operation might also be used to determine the location. XYZ Company vice president will consider the intensity of goods held in the warehouse as well as the operating area targeted by the organization. That reduces the amount of money spent in logistics while transferring commodities from the warehouse to the clients. 

The fourth factors that affects the location of a warehouse are the laws and regulations that govern the housing of a given are or region ( Stadtler, 2015) . In this case, supply chain management vice president has to enquire more about the housing and storage policies in Mexico and Canada. These policies may limit the ability of a company to store the planned amount of goods in a foreign warehouse. The renting cost may also differ from one country to the other. Many organizations will always prefer to locate a warehouse within the country’s boundaries to save the cost of transport. There is also the issue of return inwards that may affect the movement of goods from the customer back to the warehouse. 

Last but not least, material handling capabilities of a house affects the location of a storage unit. The supply chain management team must assess if the room is in a position to handle equipment and other staging facilities needed to make work easier in a warehouse. For XYZ Company, outsourced commodities must be assembled in and machines and high-intensity labor might be needed to arrange the goods in the warehouse. Therefore, the material handling capability should be in the front line of concerns. 

Recommendation and Conclusion 

Putting all the five factors into consideration, it is recommendable that the warehouse is located in America at the company site. Since the target market is the American residence, it will facilitate movement of goods from the storage unit to the clients and back.Other choices would be considerable if XYZ Company is willing to open more branches in other countries like Mexico and Canada. Supply chain management decisions are hard to make more so when the business is outsourcing commodities. However, cost calculation helps the manager to determine the best place to a source. The relationship between cost and supply chain management is mutual as they depend on each other. Experts in the field of business implemented supply chain management as a strategy for reducing the cost of production. That is due to the increase in the cost of raw materials and cost of manufacturing a single unit. Ultimately, what matters in the current market is producing or outsourcing goods and services that match the desired quality, quantity and delivered at the right time to the customers to serve their needs and wants. 

References 

Christopher, M. (2016).    Logistics & supply chain management . Pearson UK. 

Fawcett, S. E., Ellram, L. M., & Ogden, J. A. (2014).    Supply chain management: from vision to implementation . London: Pearson. 

Mangan, J., Lalwani, C., & Lalwani, C. L. (2016).    Global logistics and supply chain management . John Wiley & Sons. 

Seuring, S., & Goldbach, M. (Eds.). (2013).    Cost management in supply chains . Springer Science & Business Media. 

Stadtler, H. (2015). Supply chain management: An overview. In    Supply chain management and advanced planning   (pp. 3-28). Springer Berlin Heidelberg.