Many costs in your business are visible and I’m guessing they are scrutinised on a monthly basis, right? But what about the ‘hidden’ material costs that aren’t formally reported? How are they impacting your bottom line and could you turn these ‘hidden’ costs into more ‘visible’ savings?
The short answer is yes, but you need to know where to look.
Hidden Material Procurement Costs
Your purchasing department is responsible for managing multiple vendors and the relationship nuances that go with these. In addition they will be working on a daily basis to:
Select and approve new suppliers
Negotiate purchase contracts
Work through daily replenishment reports
Respond to ‘urgent’ shortage fulfilments
Manage supplier queries
Each of these tasks takes time, and most are expected and considered to be core parts of the process. But how much does an ‘urgent’ shortage fulfilment really cost you? The unit cost of the material may only be a few pence but what if the material is needed on a production line? How much does the production line cost on an hourly basis? What if the penny part is on a lead-time or carries a minimum order quantity? Will you pay a premium to get the part in quicker? Do you take a hit on excess stock?
I’m not going to second guess what your business does in such scenario’s, but whatever you do, I’m confident the penny part costs more than a penny now.
Hidden Material Receipt Costs
The physical process of inspecting and booking materials into your system can be measured. Let’s assume you’re already monitoring supplier delivery and quality performance in some way. So where are the ‘hidden’ material costs? This is where you might take a look at metrics that don’t feature in monthly reports such as:
Number of times the doors are opened and closed to greet couriers
How many minutes spent accessing specialist equipment i.e. forklift trucks to unload goods?
The number of minutes (and people) taken to implement H&S procedures to use said forklift
Minutes (and people) spent unloading goods
Time spent signing delivery paperwork
How long does it take to unpack, and then recycle, supplier packaging?
This may seem obvious, maybe too obvious - but it’s likely that most, if not all of these activities take place for every delivery. So how many deliveries a day do you get? How much material cost remains ‘hidden’ here? And what could you do about making some of these costs more visible?
Hidden Material Warehousing Costs
First off there’s the physical area you have available. It’s a significant visible cost on your P&L so it’s important the space is utilised in the most efficient manner. Is the layout of the area the best it could be? How much time is your staff spending away from their workstations? Perhaps ask some of your staff to wear a pedometer to find out – you maybe surprised with the results. Physical stock accuracy is no doubt one of those more visible, scrutinised monthly material costs. But have you considered the cost of some of the more ‘unpleasant’ stock control issues such as:
Stock write offs
Minimum order quantities
How visible are these to your organisation? Are they being measured and how are they being apportioned within your business?
Hidden Material Pre-Production Costs
To ensure labour and capital equipment are utilised in the most efficient way, your manufacturing team may request an element of material ‘presentation’ prior to build such as:
Material preparation i.e. cropping or pre-forming
Handling or packaging requirements
Pre programming or test
It’s worth considering if these activities are already captured within your overall costing model or need to be captured elsewhere. Hopefully I have exposed some ‘hidden’ material handling costs for you. I’m sure you will find more when you start looking. Some are more obvious than others. Some may have a greater impact on your bottom line. The key question is, how much will you save by focusing on your ‘hidden’ costs?
Back in 1973, Peter Drucker stressed the importance of ‘customer orientation’ to the success of a company. He was quoted as saying that the purpose of a company is “to create a customer. Therefore the business has two — and only two — basic functions: marketing and innovation. Marketing and innovation produce results: all the rest are costs.” As an OEM it’s down to you to determine which activities within your business are continuing to cost you time and money and which will help you create more customers.