4 hidden material costs your FD wants to see

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 discrepancies
  • Stock write offs
  • Damages
  • Minimum order quantities
  • Obsolescence

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
  • Moisture storage, 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?

Image by TruShu

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Written by Neil Sharp

Neil has over 25 years’ experience in Electronics Manufacturing Services and Component Distribution. During his career, Neil has held a range of leadership positions in sales, marketing, and customer service. Neil is currently part of the ESCATEC Senior Management Team and is responsible for setting and delivering the overall Group Marketing strategy. Neil heads up the marketing department and is responsible for both the strategy and the implementation of innovative marketing campaigns designed to deliver high quality content to those seeking outsourcing solutions.