Expediting costs: How much is too much?

Find the true expense involved to understand the direct cost

08/06/2014


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



Top Plant
The Top Plant program honors outstanding manufacturing facilities in North America.
Product of the Year
The Product of the Year program recognizes products newly released in the manufacturing industries.
System Integrator of the Year
Each year, a panel of Control Engineering and Plant Engineering editors and industry expert judges select the System Integrator of the Year Award winners in three categories.
June 2018
2018 Lubrication Guide, Motor and maintenance management, Control system migration
May 2018
Electrical standards, robots and Lean manufacturing, and how an aluminum packaging plant is helping community growth.
April 2018
2017 Product of the Year winners, retrofitting a press, IMTS and Hannover Messe preview, natural refrigerants, testing steam traps
August 2018
SCADA standardization, capital expenditures, data-driven drilling and execution
June 2018
Machine learning, produced water benefits, programming cavity pumps
April 2018
ROVs, rigs, and the real time; wellsite valve manifolds; AI on a chip; analytics use for pipelines
Spring 2018
Burners for heat-treating furnaces, CHP, dryers, gas humidification, and more
August 2018
Choosing an automation controller, Lean manufacturing
February 2018
Setting internal automation standards

Annual Salary Survey

After two years of economic concerns, manufacturing leaders once again have homed in on the single biggest issue facing their operations:

It's the workers—or more specifically, the lack of workers.

The 2017 Plant Engineering Salary Survey looks at not just what plant managers make, but what they think. As they look across their plants today, plant managers say they don’t have the operational depth to take on the new technologies and new challenges of global manufacturing.

Read more: 2017 Salary Survey

The Maintenance and Reliability Coach's blog
Maintenance and reliability tips and best practices from the maintenance and reliability coaches at Allied Reliability Group.
One Voice for Manufacturing
The One Voice for Manufacturing blog reports on federal public policy issues impacting the manufacturing sector. One Voice is a joint effort by the National Tooling and Machining...
The Maintenance and Reliability Professionals Blog
The Society for Maintenance and Reliability Professionals an organization devoted...
Machine Safety
Join this ongoing discussion of machine guarding topics, including solutions assessments, regulatory compliance, gap analysis...
Research Analyst Blog
IMS Research, recently acquired by IHS Inc., is a leading independent supplier of market research and consultancy to the global electronics industry.
Marshall on Maintenance
Maintenance is not optional in manufacturing. It’s a profit center, driving productivity and uptime while reducing overall repair costs.
Lachance on CMMS
The Lachance on CMMS blog is about current maintenance topics. Blogger Paul Lachance is president and chief technology officer for Smartware Group.
Material Handling
This digital report explains how everything from conveyors and robots to automatic picking systems and digital orders have evolved to keep pace with the speed of change in the supply chain.
Electrical Safety Update
This digital report explains how plant engineers need to take greater care when it comes to electrical safety incidents on the plant floor.
IIoT: Machines, Equipment, & Asset Management
Articles in this digital report highlight technologies that enable Industrial Internet of Things, IIoT-related products and strategies.
Randy Steele
Maintenance Manager; California Oils Corp.
Matthew J. Woo, PE, RCDD, LEED AP BD+C
Associate, Electrical Engineering; Wood Harbinger
Randy Oliver
Control Systems Engineer; Robert Bosch Corp.
Data Centers: Impacts of Climate and Cooling Technology
This course focuses on climate analysis, appropriateness of cooling system selection, and combining cooling systems.
Safety First: Arc Flash 101
This course will help identify and reveal electrical hazards and identify the solutions to implementing and maintaining a safe work environment.
Critical Power: Hospital Electrical Systems
This course explains how maintaining power and communication systems through emergency power-generation systems is critical.
click me