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As Operations Manager for the aforementioned savings &
loan, I managed an in-house print shop and purchased forms
from vendors, when the need for specialized bindery or
multi-colored printing was needed. The most obvious expense
was that of waste, as we discarded an average of $40,000 worth
of unwanted forms per month, as a result of three factors:
1. Almost every new department or division manager felt
compelled to re-do their forms, often indicating their
predecessor lacked the competence to properly design these
documents. 2. Inexperienced users over-estimated needs. 3.
Previous procurement staff was too preoccupied with obtaining
the lowest cost through volume buying, and forgot the cost of
either storage or destruction. With regard to factor #1,
managers were seldom concerned with an expense that did not
come directly out of their departmental or personal budget. At
this organization, inventory was charged to the Materials
Department, and then, as the users needed supplies, their
department was charged for only their immediate needs. This
policy resulted in frequent change and complex/multi-colored
forms.
Two solutions to this lack of concern is to (a) set a policy
to replace old forms only after the old stock is consumed,
except in cases where pricing or legal issues warrant it, and
(b) hold each department accountable for their initial stock
order, forcing the user department to take responsibility for
a proper forecast. It is much more difficult to take a broad
brush to solve problem #2. The only input on this issue is to
order a percentage of the old form's historical demand, for
three months at a time. The lowest-cost issue is the least
understood. Printing production costs equal the sums of the
cost of paper, plates and ink, labor, and equipment set-up. As
in any production environment, the cost to produce an item
will cost less, as more items are produced. This is due to the
amortization of the machine set-up and negative and/or plate
costs, over the cost of the production run. Of course, any
economics student will point out the law of diminishing
returns. But basically, this rule holds when considering short
versus long runs. However, when purchasing printing, you
must weigh the lower cost gained by printing large orders,
against the cost of (i) storage (cost per cubic foot per
month), plus the cost of funds tied up in inventory (perhaps
.05% per month). Lastly, consider the probability that the
paper may end up in the recycling bin, as a result of a change
of address, etc. May I recommend that you use the following
short run versus long run total cost formula when making a
procurement decision.
Printing - Short Run versus Long Run Total Cost
Formula
COST OF GOODS FOR THREE MONTHS = $ZZ (assume 4 stock turns per
year)
Cost of goods for Y months, TIMES Cost of funds (Y*%), PLUS
Cost of storage (Y * cubic feet), TIMES Spoilage factor (1
probability of spoiling)
Plan: PURCHASE ENVELOPES FOR YOUR FIRM. One box = 500
envelopes
Utility: One box of envelopes per month
Price: One box = $25 Volume purchase of 6 boxes = $21 each
box, 16% savings
Cost of Funds: 6% per year or 3% for 6 months Spoilage Factor:
NONE
Cost of Storage: $1 per month per foot
Let "Y" equal 6 months
Equation for cost of goods for six months
Cost of 6 month supply of envelopes $126.00
Cost of funds = Y* (% divided by 12)
$ 3.78
Cost of storage = Y * cubic feet
$ 6.00
Spoilage factor = 1 * (probability + 1)
---0----
$135.78 Total Real Expense
$135.78 / 6 boxes = $22.63 = 9.48% actual savings over 1 box
cost
Spoilage Consideration
Change of Address/Legal Terms/Tax/Phone/Employee Name or Title
Equation for cost of goods for six months, assuming last
month's product is to be replaced
Cost of 6 month supply of envelopes
$126.00
Cost of funds = Y* (% divided by 12)
$ 3.78
Cost of storage = Y * cubic feet
$ 6.00
Spoilage factor = Total * (probability 0.2 + 1)
$ 27.16
$162.94
$162.94 / 6 boxes = $27.16 = 8.62% actual loss over 1 box cost
Beware of an offer to store the surplus for you, at your
supplier's facility. This could be a camouflaged trap, as you
probably have to agree to purchase any spoiled stock and/or
pay a higher unit cost for the honor of their holding it. This
action merely places you back into the same condition you may
have been trying to get out of.
"10% over/under delivery of
order" is a phrase printers write on their invoices, stating
it is an accepted practice within the printing trade to either
short or over-ship within a 10% tolerance of the order
quantity. At face value, the condition seems logical.
However, I audited a number of receiving reports and
discovered that printers almost exclusively shipped, and
charged us for, 10% over the purchase order quantity. (It
seems that technology has reduced the uncertainty of exact
printing runs.) As a result of this discovery, I included a
term upon my purchase orders which stated that we would not
accept over-runs, unless they were individually billed at a
75% discount or sent at no additional charge. The explanation
for this payment exception is that an overrun's cost does not
exceed the cost of supplies. The discount ensures that any
savings gained through the overrun gets passed to me, the
consumer.
The greatest difficulty in purchasing printing is in
determining the market price, which is primarily based upon
quantity per item and the business sense of the vendor. As the
cost of printing is substantially and labor, as there is an
almost universal glut of printing firms in the United States,
your net cost will be in inverse proportion to your
negotiating skills. To get your costs down, you should
consider printing in a single color, and elimination of
pre-printed names, titles and or addresses on letterhead. Of
course, you will keep a return address on your envelopes, as
there is no need to frustrate the Postal Service.
A perfect example of corporate simplicity is that of
Wal-Mart. The largest retailer in the United States uses black
ink on plain paper. Many firms could learn a lesson or two in
cost-cutting by mimicking this innovative firm. To give you
the greatest flexibility between orders, insist upon the
return of your artwork, plates and negatives, when your
printing order is delivered. After all, you have paid for
these items and there is a real expense in duplicating this
portion of the production process.
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