Measuring supply chain costs using Activity Based Costing (ABC/M) – part 1

The article presents basic information regarding the cost measurement methodology known as Activity Based Costing (ABC), in terms of the benefits obtained through its practical application. This method allows traditional (often incomplete) cost data to be given a structure that significantly facilitates proper decision-making by the management of supply chain enterprises and their end customers.

It happens that a company has undergone reorganization, “slimmed down” and improved its production processes, yet its management and owners still demand increased efficiency, profitability, and ever-better economic indicators. Further reduction of internal costs with a sharp decline in the level of customer service is out of the question. Even a slight price increase can cause delays in customer payments or even their loss to competitors. Both methods lead to a decrease in sales revenue. The next possibility is the elimination of unprofitable products, service areas, channels, and customers – however, this requires prior accurate determination of actual marginal profits. Measuring revenue is not difficult, but determining actual costs is. By knowing the distribution of the share in total profit from individual product groups or market segments (customer groups), such elimination can be carried out in a more rational way. Unfortunately, by eliminating products, services, or certain customers, we face the necessity of simultaneously reducing unnecessary costs, most often in the form of staff reductions.

The third solution is changing the behavior of the company’s trading partners. Through cooperation or by creating appropriate incentives, it is possible to make suppliers and/or customers reduce the demand for the work of our company’s employees. The working time freed up in this way, and the costs associated with it, can be engaged for new customers or increased demand from old customers. (Employees can also be reassigned to other tasks.)

The last method has not yet gained proper popularity. Most enterprises customarily focus on managing costs that arise within the company. The idea of reducing the labor input of one’s own employees by causing a change in the behavior of customers or suppliers breaks the established patterns of thinking prevailing in many companies. Supply chain management imposes on companies the need to know the costs arising outside the company.

Leading to a change in the conduct of trading partners requires mutual trust between suppliers and recipients. So far, companies have usually been afraid to share information with partners, even if it would facilitate mutual understanding. One of the areas requiring disclosure is data regarding the company’s cost structure. Knowing the actual costs alone is not enough, but it constitutes an important part of the process intended to increase mutual trust.