Joe’s Journal: Chain Reaction

“The real cost is the cost of an entire process, in which even the biggest company is just one link. Companies are therefore beginning to shift costing from including only what goes on inside their own organization to costing the entire economic process, the economic chain. There are obstacles in implementing economic-chain costing. For many businesses it will be painful to switch to economic-chain costing. Doing so requires uniform or at least compatible accounting systems of all businesses along the entire chain. Yet each one does its accounting in its own way, and each is convinced that its system is the only possible one.”

–Peter F. Drucker

As Peter Drucker taught, outsourcing allows an organization to concentrate upon what it does best and delegate the rest of the production process to other enterprises that specialize in what they do best.[EXPAND More]

But, not only is this chain a supply chain, it is also an economic chain. And economic-chain costing is mandatory when a product or service is produced and delivered by multiple organizations. For example, United Parcel Service (UPS) has become the provider of logistics services for many pharmaceutical companies. UPS is organized to pick up medical products at a laboratory or factory; package the products according to manufacturer specifications; and deliver to the home of a patient. Patients can track their orders using UPS’s Internet-based tracking system.

A customer is indifferent as to how the chain works so long as he or she receives a good product or service at the right price. However, the producer selects each member of the supply chain and is very concerned about who performs what service; how they perform the service; and the unit cost incurred for providing the service. Why? Because the price consumers are willing to pay for a product or service determines the costs that are “allowable” throughout the chain. And allowable costs must in total provide sufficient profit for each provider along the chain; otherwise the economic chain is not viable as designed.

Because an organization can sell what it can distribute—not merely what it can produce—supply-chain management is increasingly how economic activity is conducted. As consumers we are the primary beneficiaries. As producers, on the other hand, we have to understand and manage costs along the entire chain if we are to reap benefits from outsourcing and alliances. This requires a change in mindset and expertise in supply-chain management and economic-chain costing.

What is easy for consumers is difficult for producers. The result is hyper-competition where the 11th Commandment is “Know they Costs” along the entire economic chain.

–Joe Maciariello[/EXPAND]