COST ANALYSIS AND OPTIMIZATION

The concept of supply chain has evolved over the years. It is no more a separate entity in an organization taking care of one specific function but has turned into an integrated system. It basically consists of 3 functions – Administrating the operations in the company, coordination of business activities and inter organizational coordination between stakeholders. For this, conventional methods of cost accounting and budgeting will not help in the inclusion of the above three dimensions of integrated supply chain management system. Organizations following the integrated supply chain will be able to fulfil on-time quality assured deliverables.

Cost optimization is very important in any business irrespective of the sector. With constant changes in the world, this becomes the key to financial stability. In supply chain, cost reduction by optimization becomes pivotal to maintain competitive advantage for suppliers and customers.

Under cost analysis and cost optimization, the four important conventional cost concepts one has to keep in mind are:

• Supply chain costing: To sum up costs under the supply chain system, direct costs, Transaction cost and activity-based cost must be included. It is myth that activity based costing can be done only on small scale industries. Modified activity based costing is being used in large scale industries.
• Pro-active costing: This is market scenario based costing. According to the externalities, cost optimization takes place. This is imperative of businesses to survive during crisis.
• Lean Management Accounting: Operational level activities are linked to help build strategy in order to enhance customer satisfaction. This is something similar to the customer relationship management in software.
• Inter-organizational Cost Management: Cost management done during the design and manufacturing of the product keeping in mind the supplier and customer needs in terms of costing.

The above concepts makes it evident that the crux of supply chain management is also present in the conventional costing methods.

The two most important perspectives in costing involved in supply chain management system are:

1) Conventional costing methods do not use target costing assumptions. Target costing assumptions help in setting up a goal and working towards it efficiently

2) The second perspective is based on activity based costing. Reference to target costing and activity based costing as the instruments of cost management plays a major role in the presented concepts.

It is hence evident that before leaping into costing related to supply chain management system, one has to be familiar with the traditional costing systems. PRO India offers a whole package of costing techniques and mechanisms with traditional costing mechanisms in its base to help companies gear up for uncertainties, survive competition and optimize its costing for sustainable use of resources.