Combining Traditional Accounting and Value-Added Activity Measures to Maximize Supply Chain Performance

Abstract

When traditional accounting of revenues and costs is used in supply-chain (SC) optimizing models, there is no economic incentive to ship goods that would reach their destinations for downstream sales beyond the planning horizon. Imposing lower bounds on ending inventories is the standard remedy used to ensure that sufficient goods are on hand to support future business. It is possible, however, to refine the planning objective with a “value-added” component to provide a fuller representation of the economic value of SC activities. Planning can occur with shorter horizons. The planning process becomes more analytically tractable, and better solutions emerge.