Logistics and Supply Chain Management, 4th Edition

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

70

The other costs that need to be included in the inventory holding cost are the

costs of storage and handling, obsolescence, deterioration and pilferage, as well

as insurance and all the administrative costs associated with the management of

the inventory (see box).

Principles of logistics costing

It will be apparent from the previous comments that the problem of developing

an appropriate logistics-oriented costing system is primarily one of focus. That is,

the ability to focus upon the output of the distribution system, in essence the pro-

vision of customer service, and to identify the unique costs associated with that

output. Traditional accounting methods lack this focus, mainly because they were

designed with something else in mind.

One of the basic principles of logistics costing, it has been argued, is that the

system should mirror the materials flow, i.e. it should be capable of identifying the

costs that result from providing customer service in the marketplace. A second

principle is that it should be capable of enabling separate cost and revenue analy-

ses to be made by customer type and by market segment or distribution channel.

This latter requirement emerges because of the dangers inherent in dealing solely

with averages, e.g. the average cost per delivery, since they can often conceal

substantial variations either side of the mean.

To operationalise these principles requires an ‘output’ orientation to costing. In

other words, we must first define the desired outputs of the logistics system and

then seek to identify the costs associated with providing those outputs. A useful

concept here is the idea of ‘mission’. In the context of logistics and supply chain

management, a mission is a set of customer service goals to be achieved by the

system within a specific product/market context. Missions can be defined in terms of

the type of market served, by which products and within what constraints of service

and cost. A mission by its very nature cuts across traditional company lines. Figure

3.8 illustrates the concept and demonstrates the difference between an ‘output’ ori-

entation based upon missions and the ‘input’ orientation based upon functions.

The true cost of inventory



Cost of capital



Storage and handling



Obsolescence



Damage and deterioration



Pilferage/shrinkage



Insurance



Management costs

MEASURIN G LOGISTICS COSTS AND P ERFORMANCE

71

The successful achievement of defined mission goals involves inputs from a large

number of functional areas and activity centres within the firm. Thus an effective

costing system must seek to determine the total systems cost of meeting desired

mission objectives (the ‘output’ of the system) and the costs of the various inputs

involved in meeting these outputs.

Figure 3.9 illustrates how three supply chain missions may make a differen-

tial impact upon activity centre/functional area costs and, in so doing, provide

a logical basis for costing within the company. As a cost or budgeting method,

Purchasing

Production

Sales

Marketing

Transportation

Etc

Supply chain

mission A

Supply chain

mission B

Supply chain

mission C

Figure 3.8 Missions that cut across functional boundaries

Functional

area/

Activity centre

1

100

50

70

220

Functional

area/

Activity centre

2

90

70

30

190

Functional

area/

Activity centre

3

20

200

50

270

Functional

area/

Activity centre

4

80

20

70

170

Total

mission

cost

290

340

220

850

Mission A

Mission B

Mission C

Activity centre

inputs

Figure 3.9 The programme budget (£’000)