Fixed costs supply chain partner

No company — or supply chain, for that matter — will stay in business if it just covers direct costs. They must recover fixed costs as well. But awareness of direct costing and its impact on behavior is important to supply chain decisions on pricing and investments. A decision to participate as a supply chain partner should consider direct costs and contribution to profit. In our Acme case study (see Chapter 10), the company chose to focus on high contribution, as opposed to high contribution margin business as part of its strategy. If our houseware executive had followed the same path, the company would have taken the Sears offer. 

By handling core supply chain functions itself, some companies are able to respond quickly. Such companies are one-stop sources for big apparel labels. Esquel customers become less likely to switch because there are few full-service providers capable of replacing them. On the other hand, those who promote asset-light companies with little or no fixed overhead cost recommend reliance on trading partners to make heavy investments. So, nonintegrated supply chains, unlike Esquel s, have their proponents. 

Supply chain companies frequently use different methods to account for fixed costs. Can partners agree on a common method What happens when one partner invests more than another does Will the nature of the supply chain require a common method for accounting for capital ... 

Another component of supply chain linkage is the quantity-timing decision for production. This decision includes the rules by which partners will order and replenish stock along the supply chain. Monden also describes the alternatives used to set up kanbans in the Toyota Production System. The first option is constant quantity. With the constant quantity decision, the same quantity is produced when a production need is triggered. This is particularly appropriate for operations with high set up costs. The selected quantity should be sufficient to assure an economic transfer. The second decision option is constant cycle. With this rule, stock is replenished on a fixed cycle. The quantity is determined by the actual amount used. 

Supply chain contracts can be of three types cost-plus, fixed price, and incentive-contract (Bolton and Dewatripoint 2004). Many procurement contracts are in fact a combination of the three, specifying incentives on some aspects and fixed-price on others. The contracting environment determines how contracts should be combined. While a contract is a convenient way of moderating partner behavior, it is of little value without a mechanism for monitoring conformance. 

---