Current purchasing methods evaluated
Traditionally, buyers send requests for quote to three plastic machining vendors each time a requirement for low volume components presents itself. The plastic machining vendor then provides a quote on the best price in several quantities with their best delivery. After all quotes are evaluated, purchase orders are placed with the lowest bidder. Ironically, this process is the most expensive way to purchase machined components, particularly for recurring, smaller quantity parts requirements.
The traditional method incurs unnecessary costs in the following key areas:
- Administrative Costs
- Unit Cost
The first cost associated with this practice is the cost of soliciting the quote and the analysis of the information. The admin time to issue the quote, phone, fax or email the request and collect the numbers can range from $15-50 per part depending on the company over head which can result in a total cost of $45-150 to solicit three bids. The cost is multiplied by the number of times per year, which can be 2-3 times. That is $135-450 annual cost per part before an order is placed.
The second issue is the unit cost itself. Most vendors evaluating a request for quote are unsure how the order will be placed. They wonder if the order will be a one-time order, whether it will be the only order for this part this year, when the order will be placed and what the schedule will be. If they need raw material to produce the part, the material needs on the quote are based on the quoted quantity only and, because of the uncertainty, will represent a higher cost. Uncertainty and low volume can add 15-20% or more in the unit cost.
The next cost incurred by the conventional system is inventory. Most companies purchase 3-6 months supply per order. This is inventory which sits on the shelve waiting to be assembled into a billable sale. Depending on the cost of money this inventory can cost ½% / month to 1% per month and can translate to several hundred to many thousands of dollars (or millions) of cost that is sitting on the shelf. That is a waste of working capital and profit.
The incoming inspection process incurs additional costs. The inspection department ordinarily inspects each shipment received. Quality inspectors are well-paid professionals and each inspection can take anywhere from a few minutes to several hours depending on the complexity of the part. Assuming that a normal part takes about an hour, an average cost could run $80-100. Add to that cost the time the parts are in inventory waiting to be inspected which could be a day or a week. That represents additional working capital wasted.
Over the past fifteen years EPP Corporation has developed a proven supply chain management system that produces maximum savings for customers. EPP’s system works as follows:
- The buyer provides drawings for all plastic machined parts that will be needed for their production over a 12-month period and gives a rough estimate of annual quantity. The quantity is not set in stone, but is necessary as a benchmark.
- EPP evaluates all the plastic machined parts together as one requirement. Material needs are combined and submitted to the material vendor. The material vendor is advised that the material will be released as needed and is expected to hold the price for one year. In the end, materials saving can exceed 20%.
- Production costs are evaluated next, and reduced to accommodate efficiency improvement expectations. Parts will be scheduled and run when similar components are being produced in order to save on tooling changes. Also, machining time is often reduced each time a repeat part is run. EPP plans for these improvements and calculates the 10-20% cost savings into the estimate.
- After the annual purchase order is placed for all the parts, the only other commitment for the customer is a delivery release forecast. A 12-week forecast that updates each week is ideal. Many customers simply forecast a monthly or weekly release and adjust the quantity as needed.
- Scheduled releases minimize excess inventory. EPP holds ample inventory in the pipeline in case of a “spike” in need driven by unusual requirements
- All parts are manufactured with strict quality standards guided by ISO procedures, SPC, and customer inspection protocol to ensure all critical dimensions are addressed. Along with the promise of dock to stock quality, the customer has the choice of receiving first article inspection reports, sample inspection reports, and certificates of material compliance for every release. This eliminates cost of incoming inspection by the customer.
Average cost of a discrete quote………………………………..$300/part/ per year
Average cost of a discrete purchase order……………..component cost plus 20%
Additional production cost ………………………………component cost plus 5-15%
Cost of excess inventory…………(interest%)(component cost)( inventory days)
Additional cost of material………………………………………5-15% component cost
Please note: savings can vary depending upon individual company costs.
There is no question that supply chain management is a paradigm shift. However if a company does the math, the pay back is enormous. The supply chain management system used by EPP accomplishes a low cost overall cost with the quality assurance and delivery flexibility provided by US manufacturing.