Improving supply chain efficiency through variance analysis

In today’s competitive marketplace, supply chain efficiency is important for businesses to maintain profitability and customer satisfaction. According to a report by Deloitte, “Companies can reduce operational costs by up to 15% through effective supply chain management.” One of the concepts to achieve this is variance analysis. This concept helps businesses identify discrepancies between planned and actual performance, providing insights to streamline operations and improve efficiency. The article will explain how to start improving supply chain efficiency through variance analysis, definition, key aspects, and applications of variance analysis in the supply chain, steps to apply, and benefits of this.

What is Variance Analysis in Supply Chain Management?

Variance in supply chain management refers to the deviation between actual performance and planned or expected performance within various elements. These variances can highlight inefficiencies, discrepancies, and areas for improvement.

Types of Variances in Supply Chain Management

Many types of supply chain management appear in supply chain operations. Some of them are discussed below:

1.     Material Cost Variance (MCV)

This type is the difference between the actual cost of materials used in production and the standard cost that was budgeted for those materials. It helps identify areas of overspending or savings in the obtaining and usage of materials.

2.     Labour Variance

Labour rate variance is the difference between the expected cost of labour and the actual cost of labour. This variance occurs because of differences in standard versus actual rates.

Variances can either be favourable or unfavourable. Unfavourable variances indicate that labour costs were higher than anticipated, while favourable variances suggest that labour costs were lower than expected.

3.     Production Volume Variance

It is the difference between the actual production volume and the budgeted production volume. It is an important concept that helps organisations identify the impact of underapplied overhead on their production costs.

Understanding these types helps in areas where performance deviates from expectations. It also allows managers to take corrective actions.

Benefits of Variance Analysis in Supply Chain Efficiency

Variance analysis has many advantages for businesses striving for supply chain efficiency, including:

• It detects areas where actual performance deviates from expected standards. This benefit helps to target specific issues for improvement.
• It helps monitor and manage costs by identifying and reducing unnecessary expenses within the supply chain.
• Evaluates supplier performance through variance analysis to improve reliability and efficiency.
• Identifies inefficient processes and bottlenecks, providing opportunities for enhancements.
• Improves service levels by addressing variances in delivery times and order accuracy.

How to Apply Variance Analysis in Supply Chain Management

By following these concepts, businesses can leverage variance analysis to enhance supply chain efficiency, reduce costs, and improve overall performance.

Step 1:  Define Standards and Budgets

• Establish clear performance standards and budgetary expectations for various supply chain elements.

Step 2:  Collect Data

• Gather actual performance data for comparison against the defined standards.

Step 3: Calculate Variances

• Determine the differences between actual and expected performance. You can also use a Variance Calculator by Criticalvaluecalculatro.com for accurate calculations. This will provide you results within seconds without any hassle and save you time.

Step 4: Analyse Variances

• Investigate the causes of significant variances to understand underlying issues.

Step 5: Implement Corrective Actions

• Develop and implement strategies to address and correct unfavourable variances.

Step 6: Monitor and Review

• Continuously monitor performance and review the effectiveness of corrective actions.

Examples Related to Supply Chain Efficiency

These examples explain how variance analysis can be used to identify issues in the supply chain and implement corrective actions to improve efficiency and performance.

Example 1

If the standard cost of a component is $5, but the actual cost is $6 for 1000 units, what is the material cost variance?

Solution

• Standard cost per unit = $5
• Actual cost per unit = $6
• Quantity = 1000 units

The formula for Material Cost Variance:

Material Cost Variance = (Actual cost per unit – Standard cost per unit) * Actual quantity

Calculation:

Material Cost Variance = ($6 – $5) * 1000 units = $1 * 1000 units = $1000 (Unfavourable)

Answer

The material cost variance is $1000 unfavourable. This means the actual material cost is $1000 higher than the budgeted or standard cost.

Example 2:

A company budgeted for 100 labour hours at $15 per hour but ended up using 120 hours at $14 per hour. Calculate the labour rate and efficiency variances.

Solution

• Actual Hours = 120 hours
• Actual Rate = $14 per hour
• Standard Hours = 100 hours
• Standard Rate = $15 per hour

Formulas

Labour Rate Variance = (Actual Hours ?Actual Rate) ? (Actual Hours ? Standard Rate

Labour Efficiency Variance = (Actual Hours? Standard Rate) ? (Standard Hours ? Standard Rate)

Substitute values into the Formulas

Labour Rate Variance = (120?14) ?(120?15) =?120

Labour Efficiency Variance = (120?15) ? (100?15) = 300

Interpretation of Results

• The labour rate variance is -$120, indicating that the company underpaid by $120 for each hour of labour compared to the expected cost. This could be due to several factors, such as negotiating lower wages with employees or hiring less experienced workers at lower rates.
• The labour efficiency variance is $300, indicating that the company used 300 more hours of labour than expected to complete the work. This could be due to several factors, such as inefficiencies in the production process or a lack of training for employees.

Conclusion

We explored how variance analysis can be a powerful concept to improve supply chain efficiency. We discussed different types of variances, their benefits, and steps to apply this technique. By understanding and using variance analysis, businesses can identify problems, reduce costs, and enhance overall performance.

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