Comparing Cost Of New Supply Chain Designs Under Uncertainty: An Empirical Study Of Challenges And New Opportunities

Companies pursuing improvements to their global supply chain (SC) are challenged with unravelling the true cost of operating with their supply chain design (SCD) (de Treville and Trigeorgis, 2010). This challenge is further intensified as SCs are faced with increasing uncertainty, ranging from increasing volatility of macroeconomic conditions, to fierce global competition, changing customer demand and the ripple effect of disastrous events disrupting the flow in a dispersed SC (Christopher and Holweg, 2011). To rectify this, this article seeks to combine Cost Accounting, Operations Management and SC Management disciplines in an integrated cost model for ex-ante assessment of new SCDs. These three disciplines provide different perspectives, which are argued to be relevant for reaching an improved understanding cost in a SC operating under uncertainty. In cost accounting, the development of Activity Based Costing (ABC) enables an accurate allocation of indirect expenses to relevant cost objects, such as products or customers. The application of ABC in a SC context is not novel (Lin et al., 2001; Degraeve et al., 2005). However, the static nature of ABC (Shapiro, 1999) makes the approach insufficient to capture the dynamics of a SC operating under uncertainty and to support future decisions. In operations management mathematical programming and simulation have been found to be well suited for capturing the dynamics of stochastic systems, such as a SC. Such models are typically formulated to provide a decision basis for minimizing cost and/or maximizing profit. However, a challenge for the useful application of these models is the reliance on perceptual cost assumptions leading to divergent outcomes dependent on departmental views (Niranjan et al., 2014). SC management literature has recently been concerned with building resilient SC structures with the aim of succeeding in an era of turbulence (Christopher and Peck, 2004; Fiksel et al. 2010; Wieland and Wallenburg, 2012). However, the realization of resilient SC structures is not straight forward, as existing approaches for economic evaluation of SCD decisions, such a Net Present Value, assume a static configuration, which does not justify building agility and robustness into the SCD (Christopher and Holweg, 2011). While real options have been proposed as a promising evaluation approach to rectify this gap, their application for SCD is still at an early stage (de Treville and Trigeorgis, 2010).
Clear synergies appear evident from combining these three disciplines in an integrated cost model for ex-ante SCD decisions. The use of ABC costing will provide a more precise understanding of cost assumptions underpinning mathematical models and the cost of building resilience in the SC. Mathematical programming will provide normative suggestion on the optimal use of internal resources for operating and sustaining the SC, and a numerical quantification of the value of options in the SCD, together with the impact of uncertainty. The paper seeks to investigate whether these synergies can be achieved for improved understanding of cost in new SCDs.