Common Unnecessary Costs: Inspection

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, the 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.

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Common Unnecessary Costs: Inventory

The conventional purchasing system incurs unnecessary inventory costs. Most companies purchase 3-6 months supply per order. This is inventory which sits on the shelf 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 thousands of dollars of cost that is sitting on the shelf. That is a waste of working capital and profit.

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Common Unnecessary Costs: Unit Cost

Unit cost is inflated by traditional purchasing methods because 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.

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Common Unnecessary Costs: Administrative Costs

The first unnecessary cost associated with traditional purchasing method 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's $135-450 annual cost per part before an order is placed.

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