Speaker 1: As you know, supply chain management is about satisfying customer service level requirements and minimizing network costs. In this lesson, we will discuss the costs that are to be minimized. There are many costs that organizations must be aware of to control within their supply chains in order to be successful. To cover all of these costs will require an extensive review and is outside of the scope of this lesson. However, it is helpful to at least briefly identify and generally discuss the typical supply chain management cost categories. These costs include labor management, facility management, materials management, manufacturing management, transportation management, and lastly, inventory management. Labor management costs are straightforward and represent those costs that are in the form of payment to hourly and salaried employees. Facility management costs are also very straightforward and represent those costs that are generated in purchase of new facilities, expansion or the closing of existing facilities, and for the regular upkeep and operation of the facility. The third category is materials management costs, which is generally about the total costs generated within the sourcing activity and mostly deals with obtaining raw materials and components. Direct material costs tend to include the actual cost of material and components, packaging, packaging materials, and tariffs. Indirect material costs tend to include items associated with the security and risk of the items. So, for example, cost of a product going bad before it is sold or expenses related to the product security are both indirect costs. As our next category and only relevant for manufacturing companies is the manufacturing management costs. In these costs, they refer to the cost that is generated as a result of purchasing material and the process responsible for transforming the materials into a final product. In this category, they are the direct material cost, which is the cost of the material. There is also direct labor, which entail the pay that is owed to employees who are actually involved in the manufacturing process. There is also the manufacturing overhead, which is comprised of any cost that is generated for the manufacturing of the items. Next is transportation management. Transportation management costs are generated within the deliver activity. While it may seem as if these costs are only about the actual transport of items, they also include costs that are generated during loading and unloading of products from the transport vehicle. Examples of transportation management costs may include the cost of vehicles, such as trucks, planes, and ships, the cost of transporting items into and out of a facility, and the cost to transport each item of a product. This category can also include the cost to outsource a portion of the organization's transportation or the cost associated with outsourcing the entire transportation function. Inventory management costs is a major area to control. Since inventory can be a huge source of waste for the company, mismanagement of it can create many challenges for the company. Examples of inventory management costs include the cost to store the inventory, the cost to move the inventory, the cost to order and set up the inventory, and the cost of stocking out. And for this, we must also remember that there are different categories of inventory which costs are generated. Raw materials inventory refers to the inventory that has been purchased by the company to use during the conversion process but has not yet been used in the entire process. Work in process inventory has undergone some processing but has not gone through the entire manufacturing or conversion process. Lastly, finished goods inventory is a fully finished product that is waiting to be shipped to a customer who has placed an order. And we also cannot forget about MRO inventory. MRO inventory stands for maintenance, repair, and operations inventory and are the items that are necessary to keep machines, technology, and processes in the company running. For example, replacing a broken part on a machine with a new part is a good example of MRO inventory. Now one question you may have is how does a company organize itself to effectively manage the processes in these various cost categories in its supply chain? The answer to that is logistics management. While we will not be diving deep into logistics in this lesson, it is important to briefly discuss what it entails. Logistics management is a subset discipline and practice of supply chain management and represents the firm's cost-cutting process of getting goods from the supplier to the focal company and from the focal company to the customers. It achieves such a process flow by concentrating on three general areas, namely sourcing and procurement, operations, and distribution. Sourcing and procurement involves the act of purchasing, receiving, and inspecting inventory from a supplier and inventory control. Some managerial activities in this area include but are not limited to finding and negotiating with suppliers, seeking to purchase items for the best price quality rating, ensuring that parts from a supplier are received at the time that they are expected, generating a purchase order and purchase requisitions, and et cetera. Operations is all about transforming inputs into outputs. That is, the operations management function is responsible for making sure that the necessary resources such as information, technology, facilities, material, and finances can be effectively placed in a well-designed and efficient process so that the company can successfully produce its end product or service. Operations activities include but are not limited to setting labor capacity, setting machine capacity, expecting goods for quality, and designing a manufacturing process, and et cetera. Lastly, distribution management deals with getting goods from the focal company to the customers. It includes all activities associated with the forward and the reverse flow of material. These activities include but are not limited to deciding whether to transport product by air, land, or sea, analyzing how specific transportation routes can save money for the company, and making sure that customers have access to purchase the products.