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By Charles W. Kyd

You may think your overhead costs are under tight control because you budget carefully and hold your people to their budgets. Unfortunately, trying to control certain overhead costs through the budgeting process is much like trying to screw down the lid on a pressure cooker while turning up the fire below: it's a futile attempt to control the effect while ignoring the cause. And the fire down below--the cost driver--is often found in purchasing decisions.

If your company is like many others, you concentrate on only one aspect of purchasing costs--the purchase price. But attention to total costs--before, during, and after a purchase--is key to controlling overhead.

To better show the sorts of purchasing costs that add to overhead, let me list some examples from a typical manufacturing company. (The same theory applies to retail and service companies, but the situation is worse for manufacturers because they must buy so many components.)

Costs before the purchase...

Design and documentation. Companies pay people to assign part numbers, list dimensions or other technical characteristics, and often generate drawings for every part that goes into a product.

Vendor selection. Many companies visit prospective vendors, check their references, and may analyze their financial statements. Even the simple purchase of an off-the-shelf component can take hours of haggling.

Other administrative costs. Companies invest in people and computers to schedule the ordering of parts. They may also maintain a staff of clerks and secretaries to support engineering, purchasing, production control, computer jockeys, and so on. They need managers. And they need paper, desks, and copiers.

Costs during the purchase...

Ordering. Most companies order by phone and then follow up with a confirming purchase order. This process involves buyers, clerks, telephone charges, computer charges, postage, multipart forms, and so on. Ordering can also involve the finance department to provide credit information, explain past deficiencies, and negotiate payment terms.

Receipt and inspection. When the parts arrive, an employee has to make sure they're what was ordered and in the right quantity. Someone else has to clear the paperwork and update the internal tracking system.



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