Most ERP systems go to great lengths to separate out material, labor and manufacturing overhead costs in the standard cost system.
When we have a long inter-company supply chain, though, it is equally important to track and accumulate the gross margin accrued for the product by each business unit that adds value to the end item. It is especially important where trade agreements like NAFTA require that certain predefined profit levels be recorded in each country where a manufacturing step occurs.
If each step in the chain merely records, on its system, the partially completed items that it receives from the previous link as inter-company purchased items, then one hundred percent of the cost is displayed as material. The margin recorded by previous links is obscured.
So the last link in the chain, the eventual seller, may not be able to tell whether a particular selling price required by a customer represents a profitable arrangement to the organization as a whole.
As an example, a Context Group client with a multi-step international inter-company supply chain was faced, recently, with a decision as to whether to agree to supply components to a high volume plant in South America. The client wanted the business to fill capacity in his plant, but the customer was only interested at a price point that was below the standard cost of the item as shown on the ERP of the division that was the producing the finished good. A thorough review of margin accrued along the chain revealed that excessive intercompany margin and pricing in one of the early steps of the chain had resulted in a final cost of the finished good which was unnecessarily inflated. The price that the customer was willing to pay was actually a good deal for the client when seen from the point of view of assessing the costs of the entire chain.
Context Group consultants can help their clients obtain the visibility to the costs of their entire supply chains that is vital to effective decision making in a complex international environment.
Contact richard.evans@contextgroup.com