P rofitability is the engine that drives all successful businesses. To manage profitability, a company must understand and have good control of both its revenues and its costs.

For a long time, companies have had a good understanding of the revenue side of the business at a detailed customer and product level. It is only in recent years, however, that they have begun to understand their costs at the same detailed level by customer and product. To gain that insight, many companies use total delivered cost (TDC)— the complete cost of sourcing, producing, and delivering products to customers. TDC, in turn, has become a critical metric in guiding supply chain planning decisions.

Total delivered cost is indeed an important tool in sup-
ply chain planning. However, we have observed that many
companies do not make the best use of TDC in their supply
chain planning process because of three common errors or
oversights. First, many of them use a historical TDC metric,
rather than a metric that is based on the supply chain costs
they will incur now and in the future. Second, they often
make oversimplified assumptions, ignore certain compo-
nents of TDC, or use average accounting allocations rather
than product-specific operational data when computing
TDC. And third, companies often fail to use optimization
technology to simultaneously make, for each product, the
interdependent decisions in sourcing, production, ware-
housing, transportation, and distribution that will have an
impact on TDC and yield the best overall future plan.

Most companies calculate total delivered cost (TDC) based on inaccurate and outdated
assumptions. Using optimization technology to more accurately forecast TDC by product and
customer will help them to improve both their supply chain planning decisions and their costs.