News & Events

The Hidden Costs of Volume Purchasing

Posted by: Jeff Greenberg | Posted on: February 21, 2014 | 1 Comments

 

This piece is originally from The Kitchen Coop’s August 2013 Newsletter. Subscribe to The Kitchen Coop’s Newsletter ever miss valuable manufacturing content, updates on The Kitchen Coop, and upcoming local and regional food industry events.

Your business is doing great! Sales are going well and new orders keep coming in.  As you are planning your next production run you call your supplier to discuss the next purchase order. Your supplier is very happy that business is going well for you and begins to discuss the benefits of increasing the size of your next order to reduce your prices. On the surface this seems like a great idea and it very well might be but before you triple your order to obtain volume discounts, be sure you consider the entire cost picture.

Often times, growing companies do not consider the hidden costs associated with increasing purchase quantities. The indirect costs are harder to capture relative to the direct purchase costs that you will incur when you place that large order.  But they offset and can exceed those discounts. Examples of the hidden costs include:

  • The additional cost of warehousing (receiving, inspecting, material handling & storage). Receiving of large orders can be daunting and often large orders have hidden damage or other issues buried within them that are harder to see. Real estate inside food warehouses can be expensive, so consider the storage fees.
  • Reduction of working capital that is tied into the order. Meaning, you will not receive the return of investment as quick for inventory that is warehoused; in addition, you are not earning interest on that money in the bank.
  • Potential for the incurrence of interest expense. Larger orders are often bought on bank or supplier credit— remember that use of other peoples money (credit) usually comes at a premium.
  • Potential for an increase in inventory obsolescence or other shrinkage (theft, damage, etc.).
  • Decrease in flexibility and innovation (you have to use the “old” boxes before any changes can be made). This is particularly troublesome with food where the product inside and ingredient much match.
  • Decrease in efficiency or an increase in scrap as employees under value materials that are not scare (“its ok, we have 19 other pallets in the warehouse).

These are just a sample of the potential hidden costs associated with the purchase of large quantities of materials at a discount. One alternative to consider is a master purchasing arrangement in which you agree to buy a certain quantity over a certain time, but to take delivery (and pay for) only what is needed on a periodic basis. This is the type of arrangement The Kitchen Coop develops on behalf of its clients as we leverage the buying power of our collective. Teaming up with other producers is another way to sway suppliers to offer that volume discount without incurring the hidden costs mentioned here. As you contemplate your next purchasing move, be sure you make an informed decision and remember The Kitchen Coop is here to help.

Comments (1)


  1. Kathleen -
    February 24, 2014

    Great article…it is so interesting, you don’t think about some of these things!