This time we examine eight key supply chain management accounting (SCMA) techniques that can be used in specific supply chain situations.
Open book accounting
This is where management accountants share cost information about relevant processes in the supply chain, both within and across organisations. The purpose is to identify non value adding processes that could be withdrawn without detriment to the customer - or that could even enhance customer service.
Open book accounting promotes margin improvement through cost reduction, which can be shared between partner organisations. If both supplier and customer share process cost information, they are more likely to be successful in identifying non value adding processes.
Value chain costing
Value chain costing builds on Porter’s value chain analysis which argues that competitive advantage in the marketplace results from either better customer value for the same cost (a differentiation strategy) or the same customer value for less cost (a cost leader strategy).
A series of activities, or ‘links in a chain’ occur between a product’s design and its distribution. Management accountants need to identify where in the chain:
customer value can be enhanced
costs can be reduced or
differentiation can be achieved in the company’s segment of that value chain.
Target costing
Here, management accountants must determine a target cost for a newly designed product or service to satisfy customer need. The target cost is reached by identifying a selling price for the product or service, and then subtracting the amount of profit margin required from that product or service by the company’s overall long term margin requirements.
Target costing is usually implemented during the development and design phases of the manufacturing or service process. If costs are exceeded after the target cost has been set, management accountants need to identify process changes to meet the target cost.
Quality costing
Quality costing is an important SCMA technique that aims to improve supply chain quality, both in and across organisations. It has two benefits – to reduce quality costs and to increase the quality offering to the ultimate customer. Quality costs are:
the cost of conformance (costs of prevention and costs of appraisal)
the costs of non-conformance (costs of internal and external failure).
The intention is to reduce poor quality and waste by improved preventative measures that minimise the recurrence of failure costs and improve customer experience. Management accounting has a significant role to play because organisations can be unaware of the costs of failure.
Performance measurement
This needs to occur throughout the supply chain, and should include both financial and non financial measures. The balanced scorecard can be extended to include supply chain partners, because the objective is to create a far more competitive supply chain than the alternative supply chain providers of that product or service.
The balanced scorecard has its greatest impact when it drives the change process in support of the organisation’s strategic intentions.
The challenge for management accountants is how to extend the traditional balanced scorecard (financial perspective, customer perspective, internal perspective, innovation and learning perspective) across supply chain members. This demands a sound understanding of the key performance areas that will drive competitive advantage.
Make versus buy (outsourcing)
Traditional management accounting techniques such as ‘make versus buy’ are often used in a supply chain context, particularly when identifying opportunities for outsourcing. However, caution must be exercised, because outsourcing decisions must be made in the strategic contexts of ultimate customer satisfaction and preservation of the company’s core competences - that is, what it must be able to do to survive.
Outsourcing, where it occurs, should enhance the ultimate customer proposition. ‘Make versus buy’ accounting needs to take this broader requirement into account.
Benchmarking
Management accountants can use benchmarking to compare performance of one organisation against the best in class to provide a particular product, process or service.
The technique can be extended to benchmark performance across supply chains - for example, different supplier performance or different customer performance in terms of using a particular product or service.
Benchmarking is often used in conjunction with other SCMA techniques – for example, there are numerous examples of firms using activity based costing and benchmarking together.
Activity based costing
This approach to costing focuses on processes rather than functions. Finance professionals can only manage costs by managing the activities that cause the costs. The key aspect is to identify cost drivers and to allocate costs to an activity on the basis of that cost driver.
Activity based costing collects data that cuts across traditional organisational functional boundaries. It can be used alongside continuous improvement programmes such as Six Sigma or Kaizen to create leaner and more responsive organisations and supply chains.
Activity based costing can also be used with open book accounting and quality costing to remove non value adding processes. In terms of supply chains, it is essential to undertake activity based analysis, both inside and outside of traditional organisational boundaries.
