There are good costs as well as bad costs in the supply chain

Filed in archive Research on January 13, 2009

Jonathan Byrnes is one of the greatest SCM lecturers in MIT who has combined many years of experience with theory to offer rock-solid insights.

I recently read a piece from him on managing supply chain in the recession times. He was mentioning his research across a dozen of industries which showed:

At least 30 percent of each company's business by any measure (accounts, products, etc.) is unprofitable; but such inefficiencies are normally offset by some money generating islands within the firm.

He concludes based on this finding that there are bad costs and good costs. If somebody starts the cost reduction initiative at the board level ("Let's cut inventory at all divisions by 10%"), he/she might create an un-intended negative effect for the profitable part and cut the necessary support for creating cash in those divisions.

He suggest activities like Profit Mapping as a necessary step before doing any cost reduction; the type of the effort which only requires two managers and a PC for two months.

I will later write more on the tools used for profitability analysis in supply chain. Keep visiting Supplychainer.com