Expediting costs: How much is too much?
Expediting costs include premium transportation charges and incremental unit prices incurred as a result of expediting delivery of material from the supplier. Of course, there are other indirect (and sometimes much greater) costs associated with expediting, such as lost production waiting for parts. For purposes of this discussion, however, we will focus only on the direct costs.
Expedites are generally accepted as a cost of doing business. However, they are not always a necessary cost of doing business. Too often companies hide behind that mantra as a way of accepting the additional cost of expediting without any justification of the need, or just avoiding the effort of tracking them at all. If you don’t know why you are expediting material and how much you are spending on it, how could you possibly know whether it’s too much?
If you search long enough, you may find one or more sources suggesting that 2% is the benchmark for expediting. The problem with this is they don’t specify 2% of what. Is it purchase orders? Line items? Dollar value? Is it 2% of all purchases or just MRO?
There are also those who say that 0% or $0 is the benchmark. Some would argue that absolute zero is an unrealistic objective for any metric, particularly this one. However, having a goal of even one expedited shipment each week or each month is accepting a gap in your processes. If I had to choose between the two extremes, I’d try for zero.
In reality, though, it’s not the benchmark that really matters. What matters is the frequency of your expedites, the total amount of money you are spending on them, and whether they can be avoided. So where do we get this information?
Many companies struggle to extract expediting costs from their purchasing or accounts payable systems, and frequently give up trying because they just can’t get accurate data. But that doesn’t mean it isn’t readily available. Since these are (hopefully) rare and usually widely publicized events, it shouldn’t be difficult to know when they occur.
All expedite requests should be reviewed by the line organization and the functional buyer to validate the reason—typically an emergency, stockout, or unplanned requirement—and determine the estimated cost of expediting the material. The buyer should not authorize the supplier to expedite the shipment unless and until the requester has been informed of the additional cost and has provided approval to proceed.
All that’s required is for the buyer to ask the supplier how much it will actually cost to expedite the material (which they should be doing anyway) and write it down somewhere when expedites are authorized. Not only can this data be easily tallied and reported at the end of each week or each month, but it will also provide a baseline to ensure that the actual charges are in line with what was quoted.
Many expedites can be prevented through better equipment reliability, preventive and predictive maintenance programs, and effective planning and scheduling of maintenance work. The real test of whether your expediting costs are too high lies in whether they are truly unavoidable. Analysis of the data provided by the buyer should allow management to easily make those determinations.
Doug Wallace is a senior consultant and materials management subject matter expert for Life Cycle Engineering (LCE). Doug can be reached at dwallace@LCE.com.