Strengthening your supply chain one link at a time.
Imagine you’re planning a delicious meal. You need ingredients (variable cost) and kitchen tools (fixed cost) to bring your recipe to life. Supply chain network modeling is similar. Companies like St. Onge Company help businesses design efficient supply chains, considering both the ongoing expenses (variable costs) and the upfront investments (fixed costs). But what exactly are these costs, and how do they influence the design of a supply chain network?
Fixed Costs: These are expenses that remain constant regardless of the level of goods or services produced. Fixed costs include rent, permanent staff salaries, insurance, and equipment depreciation. For example, a factory’s rent and machinery depreciation costs will stay the same whether running at full capacity or not producing at all.
Variable Costs: These are costs that vary directly with the production level. Variable costs increase with higher production volumes and decrease when production drops. They include expenses such as raw materials, direct labor, packaging, and shipping. For instance, the more products a factory produces, the higher the costs for materials and labor.
The specific mix of variable and fixed costs can vary greatly depending on the industry. Here are some examples:
Now, how do these costs tie into supply chain network optimization? Here’s how it works:
Fixed Costs: When designing a supply chain network, we consider factors like the number and location of warehouses, distribution centers, and production facilities. Each additional facility adds to your fixed costs. However, strategically placed facilities can reduce variable costs by minimizing transportation distances and lead times.
Variable Costs: Optimizing transportation routes, production processes, and inventory levels all contribute to minimizing variable costs. Network modeling helps us determine the most efficient flow of goods throughout the supply chain.
Just like a perfectly balanced meal, a well-designed supply chain network considers both variable and fixed costs. We want to minimize total costs – both fixed and variable. Sometimes, adding a strategically placed facility (fixed cost) can significantly reduce overall transportation costs (variable cost), leading to a net benefit.
Here at St. Onge Company, we use sophisticated modeling tools and our deep industry knowledge to help you analyze your fixed and variable costs and design a supply chain network that minimizes your total cost picture. Our approach considers factors like:
By considering both fixed and variable costs, we can help you achieve a more efficient, cost-effective, and responsive supply chain that gives you a competitive edge in your industry.
In conclusion, understanding the interplay between fixed and variable costs is essential for any business looking to optimize its supply chain network. By working with St. Onge Company or a qualified consultant, businesses can leverage expertise to create efficient networks that deliver products cost-effectively, ensuring a “delicious outcome” for everyone involved.
—Odi Niyomugabo, St. Onge Company