Consolidated Freight Quotes

Total Cost Analysis When the purchasing staff considers switching to a new supplier or consolidating its purchases with an existing one, it cannot evaluate the supplier based solely on its quoted price. Instead, it must also consider the total acquisition cost, which can in some cases exceed a product’s initial price. The total acquisition cost includes these items: • Material. The list price of the item being bought, less any rebates or discounts. • Freight. The cost of shipping from the supplier to the company. • Packaging. The company may specify special packaging, such as for quantities that differ from the supplier’s standards and for which the supplier charges an extra fee. • Tooling. If the supplier had to acquire special tooling in order to manufacture parts for the company, such as an injection mold, then it will charge through this cost, either as a lump sum or amortized over some predetermined unit volume. • Setup. If the setup for a production run is unusually lengthy or involves scrap, then the supplier may charge through the cost of the setup. • Warranty. If the product being purchased is to be retained by the company for a lengthy period of time, it may have to buy a warranty extension from the supplier. • Inventory. If there are long delays between when a company orders goods and when it receives them, then it must maintain a safety stock on hand to guard against stock-out conditions and support the cost of funds needed to maintain this stock. • Payment terms. If the supplier insists on rapid payment terms and the company’s own customers have longer payment terms, then the company must support the cost of funds for the period between when it pays the supplier and it is paid by its customers. • Currency used. If supplier payments are to be made in a different currency from the company’s home currency, then it must pay for a foreign exchange transaction and may also need to pay for a hedge, to guard against any unfavorable changes in the exchange rate prior to the scheduled payment date. These costs are only the ones directly associated with a product. In addition, there may be overhead costs related to dealing with a specific supplier (see “Sourcing Distance” later in the chapter), which can be allocated to all products purchased from that supplier.