The following presents extracts from a case study on the use of an ABC cost model by a large UK retail firm (Sainsbury’s) and a group of suppliers for supporting their supply chain management practices. This cost model was based on the principles of value chain analysis and integrated cost information across the supply chain. It was used to improve supply chain operations by performing benchmark analyses, strategic what-if analyses and cost monitoring. The model was used to identify opportunities to reduce supply chain costs.

To be able to analyze the supply chain costs, cost and cost driver data were required from both Sainsbury and suppliers. Suppliers who chose to participate in the initiative were required to deliver cost data and cost driver quantities to Sainsbury for feeding the supplier section of the model. Benchmarking was used to compare suppliers’ activity costs with the average of their network. In addition, cost comparisons were made between networks, regions and store types. By clustering suppliers into different networks the most important differences between their operations were eliminated, as suppliers within a network performed fairly comparable activities. The most important measure for the benchmark analysis was the cost per cost driver (i.e. the cost driver rate), as this measure could be compared directly with other suppliers. The benchmark analysis revealed the suppliers’ relative performance against the network average.

When a supplier deviated significantly from the average, the logistics operations department would initiate a discussion with the supplier to find out the cause(s) of the difference, by analyzing the underlying activities, and to assess whether and how performance could be improved. In addition, comparing the costs of their activities and analyzing the differences in their operations could be used to transfer efficient supply chain practices across networks.

Strategic what-if analyses were performed to analyze the effects of changes in the supply chain on supply chain costs. When, for example, as a result of a benchmark analysis, Sainsbury and a supplier developed ideas or scenarios for improving supply chain processes, the model was used to calculate the expected changes in costs of each scenario.

Questions 

1 What kinds of activities might be included in the benchmark analysis?

2 What cost drivers might be used within the benchmark analysis?