Integration of Quality Cost into a Total Cost Model for a Distribution Network

Abstract Effective supply chain management requires integration of the interconnected operational steps from raw material supplier through production, distribution, and final product delivery. These links must operate effectively and efficiently for the supply chain to achieve its primary objective: increased customer value at each step. Distribution systems are particularly critical components in supply chain networks since they are often the last direct interface with the customer. As a result, distribution error in the supply chain cannot be corrected and will impact customer satisfaction, ultimately leading to possible lost sales or customers. Total cost models are powerful tools to model supply chain system elements and evaluate the benefit-cost tradeoffs that are essential to make effective management decisions. This paper describes use of a total cost modeling approach to analyze the distribution system of a large metropolitan newspaper. Poor distribution quality and declining customer satisfaction motivated management to examine the relationships between cost and operational performance to identify the primary drivers of system inefficiency and increased cost. A benchmarking study of similar newspapers identified relationships between operational factors such as carrier pay, route structure, employee turnover and customer complaints. These relationships, along with the cost of quality deficiencies, were used to develop a total cost model that justified the business case for system wide improvement. As a result, management was able to identify the investments that improved performance and reduced total cost. This paper demonstrates application of a total cost model to examine supply chain system costs, identify quality costs and related drivers, and evaluate operational alternatives.