March 14, 2012 3 Comments
I recently wrote a blog article about achieving a target product cost through design and process improvements. A fellow colleague wrote a great comment regarding total cost vs. unit cost as a method for supply chain decisions.
Yes, total cost is different from unit cost. This begs the questions: what is total cost? An economic definition includes variable cost, fixed cost, capital expended and the total opportunity costs of each production input. While this definition is accurate and makes sense in theoretical economics, it is not very helpful to those of us charged with making complex supply chain decisions.
To unravel the more essential question: “what are the components of total cost relative to my product, my company, my manufacturing facility?”, me and my team, have created the following model:
This model, revealing the total cost of manufacturing, can seem overwhelming. However, studying the model does give us an insight into just how complex costing can be. And while there are barriers to accurate information, the model can be used as a begining point to drill down into each component and then re-assemble or roll up into a total cost, creating a more robust decision making platform.
What have been your challenges in determining total and unit costs?