Product Cost Management – Routes, Shipping Carriers and Supplier Selection

Product cost management includes much more than just estimating the cycle and setup times for manufactured parts. Estimating beyond the part cost into the product cost includes the calculation of ever-changing material costs, overhead costs, shipping, supplier selection, and much more. When it comes to the packaging of a part, groups of parts, or an assembled product — the cost of the part can sometimes skyrocket because of ordinary oversights — through shipping and transportation.

Parts may become distorted or warped during shipment.

Something I find fascinating about what affects product costs is in the area of shipping and transportation — all starting with packaging.

In a recent conversation, with one of our heavy equipment customers, a senior manager from cost management shared with me some of the problems they have encountered during this process. One in particular is where parts change their shape, become distorted or get warped during shipment and because of this likely possibility they need to account for these situations and be more selective in the suppliers they choose. On-going supplier review and selection affects the overall cost value of the part which ultimately affects the final product cost.

Knowing the actual manufacturing cost, the shipping routes, and issues that can occur help formulate the final cost of the part. Minimizing some of these costs requires extensive disclosure by management. This includes finding and selecting the right supplier, shipping carrier and route for the parts to be transported, all the while, helping to ensure the parts reach their next destination – safely. Estimating these unanticipated costs isn’t easy and when time is pressing its easy for somethings to be overlooked.

For example, sometimes manufactured parts are incorrectly strapped to the shipping truck or to the shipping container — either too tightly or even too loosely. It is challenging for shippers to correctly package and bind down parts onto shipping truck decks or to shipping containers. This challenge occurs from having different weights and tolerances contained within the part and knowing how to pack and tie them down. Unfortunately, if done incorrectly, this may result in the part warping during shipment — making the part no longer usable in its current delivered state.

Depending on the condition of the part any or all of the following may be required – all which increase the product cost:

  1. Excess time spent trying to bind the part precisely to avoid warping.
  2. Additional packing/shipping crates and components to hold the part.
  3. Additional stops during shipment to identify if the part is safe or needs re-strapping.
  4. Costs associate with attempts to unwrap and reshape the part at its destination.
  5. Excessive costs resulting from discarding components and having them remade.

Minimizing the manufactured and final product cost requires quality tools for the manufacturing industry. From start to finish, manufacturing teams need the ability to identify what can happen and anticipate necessary changes to avoid unnecessary costs that can incur — as specifically identified here with transportation. This is just one of the many challenges faced during cost estimating for the product cost management team.

What experiences has your team encountered that you could share to begin a conversation?

Product Costing – Knowing What Your Products and Services Really Cost Means Higher Profits

How much money do you lose because you don’t know what your products or services really cost to produce? Here are some “home truths” about costs that you should know.

Do you really know what your products and services cost to manufacture or provide? I would be astounded if more than 1% of business owners knew the true cost to them of what they sell. The majority of business owners will know what the total costs for all products or services they sell but it is almost a given that the costs of each individual item is not known.

If you do not know the true cost of the things that you are selling, how do you know whether any of them are making a loss? This is the classic result of the lack of information about costs. Say you sell 10 different products. Overall, you make an 18% gross margin, but you do not know which products are the most profitable. Unfortunately, what is quite likely is that one or more of the products is making a loss. It could even be your highest selling product.

Some traditional accounting methods are dangerous. Yes, I am an accountant and I am going to criticise my own profession. Over the course of the 20th century, as mass production became an important part of producing our way of life, methods developed to try to help managers calculate how much things cost to produce. The problem is that many of these methods are down right misleading. They can lead you into making the opposite decision to what you should make. And worse, the poor information can mean that a company operates at much lower profitability (or in losses) for years due to poor information.

Don’t blindly accept what accountants tell you. Some accountants can become very locked into their ways. They can get a costing system operating like clock work. The trouble is that the clock is telling the wrong time! Information is churned out and submitted to managers. Managers accept the status quo and do not understand the basis on which the accountant’s conclusions have been made. If you are relying on costing information to make important decisions for such things as product mix, the number of people that you employ, what you will spend your advertising dollar on and so forth, I strongly advise you to understand, in detail, the logic behind the information that you are being given.

Activity based costing can be a solution. When it comes to owner-operated businesses, activity based costing has got a bit of a bad name. It has been seen as something only big companies do. While it is true that activity based costing can become very complex, it can still be applied to small and medium businesses in a cost effective way. And if you are using a traditional costing methodology, the chances are good that activity based costing will give you more accurate information.

Conclusion. Owner operators almost never properly understand the costs of producing what they sell. This misunderstanding leads to poor decisions and lower profits. You should make it an important part of your management processes to periodically review your costing methods. If you are not using activity based costing, this is something that you should consider.

Wishing you easier business.

John Jeffreys

Reduce Your Document Production Costs

What does it cost your organization to create and manage the documents that you use within your business? Industry analysts report that document expenditures can consume from six to ten percent (6-10%) of corporate revenue*. The phrase “document expenditures” includes hardware, supplies and labor costs. Six to ten percent of revenue provides plenty of financial incentive to look more closely at this area.

Each of the cost areas that comprise “document expenditures” has the potential to be decreased and each area needs to be approached differently. The labor portion of document expenditures can be evaluated in terms of business processes. Next, determine how each department is affected by the documents utilized within them. For example, your organization may have numerous brands and models of output devices that your IS or IT department supports. This scenario will create more help desk requests than an organization that has a smaller variety of output devices. Higher help desk requests means higher costs.

Although the choice of output device selected for a print job will affect your ultimate cost, there is another, usually overlooked, cost reduction opportunity. Your organization’s understanding of your “current spend” (total costs) for printers (print engine based devices- including printer based multi-functional devices) and copiers (copier engine based devices-including copier based multi-functional devices) will greatly affect the hard dollar cost of your document output. The relationship between your current spend and industry cost averages is the important piece to focus on.

The copier and printer industry focus on different areas for making profit. In the printer industry, equipment hardware sales are very closely controlled by the manufacturer. Although you can buy a printer from numerous sources, you will not find significant variance on the purchase price of the hardware. The printer industry focuses instead on consumables and to some degree extended warranties or service contracts for its profit generation. These are the areas to focus on to reduce costs.

The copier industry’s products are primarily distributed through dealer organizations (there are several direct manufacture sales channel exceptions). These dealer organizations range from small, independent companies to multi-billion dollar, national organizations. What they have in common is that they set the price for equipment hardware, consumables and service support, instead of the manufactures.

The copier industry is successful in restricting cost benchmark information flowing to customers, from within the industry. This fact explains the pricing disparity that exists within its client base. After having personally completed several thousand “current spend” analyzes, I can attest that no two transactions are priced alike. Over the course of my twenty eight year career in the copy, print and fax industry, I have identified twenty seven (27) sub-categories of cost that can make up your total cost of ownership (current spend). I believe this is why I have yet to see any two similar transactions priced the same.

The good news is that this same complexity allows room for a significant reduction in hard dollar cost. The challenge is…how do you quantify the opportunity and recover the cost savings?

The only two viable methods I have seen are: 1) implement a bid process internally to evaluate the current market versus your current spend (total costs) or 2) engage a performance-based, cost reduction specialist to evaluate your current spend and reduce your hard dollar costs.

The advantage of conducting your own internal cost evaluation is that you can use your own internal resources, which means there is no fee associated with the project. The downside is that your internal resources will not have accurate “cost of goods” or service support benchmarks to use in the evaluation of their bid analysis. In other words, your staff can choose what they “feel” is the best value from the bids collected, without really knowing if the industry can actually offer more. Another challenge is that you may not have the labor resources available to conduct your own industry and vendor research. Without current knowledge of the industry it will be difficult for you to create a Request for Proposal (RFP) that includes the necessary metrics to gather the data needed to effectively evaluate vendor proposals.

The advantage of engaging a performance-based, industry specialist is that if they do not deliver measurable cost reduction, you owe them nothing as their service fee is entirely based on the level of hard-dollar savings they recover for your organization. In essence you receive, at minimum, a double check of your “current spend” and opportunity potential at no charge. In addition, because cost is only one criteria comprising “value”, an industry specialist should also enhance the service performance of your vendor.

The obvious downside is that you will pay a fee to a competent cost reduction specialist. You can, however, mitigate the fee “risk” by comparing the estimated results that your internal resources can produce to that of the industry expert. For a cost analysis of the two available options, you only need to confirm that the cost reduction specialist’s, hard dollar cost reduction estimate, minus their fee is greater than your internal team’s estimated results minus their labor costs. Remember to evaluate whether your internal team actually has the time resources to complete the project. The flip side to having no time available for the internal project just mentioned; the industry expert will deliver results needing very little of your time.

The sign of a truly competent cost reduction specialist is one who provides a performance guarantee. They will guarantee to deliver the savings figure estimated on the front-end or the project is completed at no charge.

“Our analysis reveals that overall document expenditures (including hardware, supplies, and “people” costs) averaged 6% of annual revenues across all industries” – Assessing & Benchmarking Document Costs: Developing a Future Document Strategy, InfoTrends 2006 “IDC end-user research has confirmed that companies spend approximately 10% of their revenue on document production, management and distribution.” – The Expanding Role of Document Accounting Systems, IDC 2001“6 to 10% of annual corporate revenue is spent on document-related activities.” – Xplor International

* Document Cost Statistics