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Fixed & Variable Costs in Supply Chain Design

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:

  • Retail: Retailers typically have high fixed costs due to store leases, employee salaries, and technology infrastructure. Variable costs include the cost of the products they sell and shipping costs to stores. Here, optimizing store locations and managing inventory levels to minimize storage costs becomes crucial.
  • Manufacturing: Manufacturing companies often have significant fixed costs for factories, machinery, and research & development. Variable costs can include raw materials, labor for production, and waste disposal. Optimizing production processes and sourcing materials efficiently becomes a priority.
  • Service Industries: Consulting firms have high fixed costs for employee salaries and office space, while variable costs might involve travel expenses and software licenses. Optimizing employee hiring plays a pivotal role here.
  • E-commerce: For e-commerce businesses, fixed costs can include website maintenance, marketing campaigns, and warehouse space. Variable costs include packaging materials, shipping fees, and payment processing charges. Optimizing fulfillment centers and choosing the right shipping partners becomes key.

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:

  • Transportation Network Analysis: We identify the most efficient routes and modes of transportation, minimizing transportation costs (variable) without sacrificing delivery speed.
  • Facility Location Planning: We help you determine the optimal number and location of facilities, balancing the need for geographically dispersed inventory (fixed cost) with the cost of moving goods between facilities (variable cost).

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

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St. Onge Company is Proud to Once Again Have Been Ranked Among the Highest-Scoring Businesses on Inc. Magazine’s Annual List of Best Workplaces for 2024

We have been named to Inc. Magazine’s annual Best Workplaces list for the second year in a row! Featured in the May/June 2024 issue, the list is the result of a comprehensive measurement of American companies that have excelled in creating exceptional workplaces and company culture, whether operating in a physical or a virtual facility.

From thousands of entries, we are one of only 535 companies honored.

Click here to see our listing!