The Impact of Late Deliveries – and How It Can Be Avoided
Late deliveries – we have all experienced being promised a certain product by a specific date only to have that date come and go with no product arriving and no advanced warning from our vendor. Let’s be honest, there are times when the delivery date was arbitrary and exact adherence to the “promised date” is not critical.Therefore, it’s no big deal.
However, in the fast paced environment of “Lean Manufacturing”, these instances are becoming rare. When we talk about “Precision Machined Parts”, which are integral components in many manufactured products, the impact can be significant.
If you are a company which purchases machined parts, here is a theoretical example of how it could impact you.
Let’s use the example of a make-believe company that produces hydraulic pumps that are made for earth boring equipment, used to lay gas transmission lines. We will call them Specialty Pump Manufacturing, Inc., or SPM.
The pumps are sold for $4,000 per unit. In order to keep up with a growing demand for their product, SPM has doubled its production over the past 5 years from 25 to 50 units per month. Sales over the past 12 months were $2,400,000. At this point in time they typically hold “a 10 unit Safety Stock” of completed product in inventory.
The company recently landed a 10 unit per month contract with a new customer. This would increase its sales to 60 units per month. Production said that this could be accomplished, so marketing was conservatively projecting $2,880,000 in sales for the next 12 months.
Originally, SPM outsourced the machining of its key components to a local machine shop well known for high quality and on-time delivery. They charged $400 per unit for the machining work. Two years ago, SPM found a new start-up machine shop that produced the same work for $360 per unit. Over a one year period, taking small incremental steps to assure performance, they transferred all of the work to the new supplier. This resulted in a total savings of $20,000, or 10% for the past 12 months, a tidy sum.
However, 2 weeks ago this machine shop missed their delivery, which resulted in a one week shut down of SPM’s assembly process. Unfortunately this coincided with the promised delivery of the initial 10 piece order with the new customer and a 10 unit order with their #1 customer (which has purchased 10 units per month for the past two years). They unsuccessfully attempted to negotiate a 5 unit delivery for each customer that week, so in the end they chose to deliver their 10 unit “Safety Stock” to their #1 customer. This was a tough call and as a result, the new customer immediately canceled its 10 unit per month contract. OUCH!!
Here is the projected impact of this event for the next 12 months:
- Cost Savings realized by using the new machine shop:
- 50 units per month * $40 per unit savings = $24,000
- Lost production for the one week shut down:
- 15 units * $4,000 per unit = $60,000
- Lost sales from the canceled contract:
- 120 units * $4,000 per unit = $480,000
So for SPM, $24,000 saved from choosing a lower cost source for their machined parts resulted in a loss of $540,000. Clearly, the wise choice would have been to remain with the original machine shop.
My name is Neil Hergatt – President of Hergatt Machine, Incorporated. Who among us has not had to make a decision similar to SPM’s? In the world of precision machining, the overall cost of outsourced product cannot always be measured by purchase price alone.
We are ISO Certified and Gorman Rupp Pumps of Mansfield, Ohio recently awarded us as their “Best Machine Shop” two years running. If you struggle with meeting deadlines because of unreliable deliveries of machined parts, Contact me today and we can discuss solutions that will guarantee you’ll avoid the impact of late deliveries by purchasing from Hergatt Machine