Friday, March 16, 2012

Why Pay for Overruns?

A response to a customer regarding the option of buying overruns. Customer feels that he always get free overruns from others, why is it we are charging them for overs.

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It is actually very customary to charge for overruns and discount for unders here in the U.S. and other places. You have the “option” of buying the overs at the same unit price if they are useful to you. When the overs is less than 1%, there is usually not a big deal in giving it away to customers. 1% on a standard job is really nothing; we do that all the time. But when an order has a very high qty count, even at 1% may represent a significant cost.

In normal circumstances, and when the overs are really low, we would really try to pry those from the factory and give them to the customer. But when we run a hairline margin on the order in question, and when the overs are high, the factory will not give them away.

The concept of overs and unders is an inherent part of manufacturing. Anything that’s customized, the factory will have to buy more material than what’s being ordered. This is normal as there are always some wastage during the manufacturing process. And you are absolutely right, the quoted price should have already included additional material to be sacrificed in projected wastage; this is very true. If everything goes as planned, or even if goes better than planned, we should have either exactly the qty ordered or a little bit overs. Your past experience may have been based on this scenario. But, in the event that the wastage is more than originally anticipated, then you’ll end up with unders – final qty will be less than what you ordered. In that case, factory will give discount based on the unit price. It is very fair, you pay for only what you get. And since the factory did more wastage than they should, they deserved to be punished for the money they could have earned if they had controlled their wastage.

In real practice, especially for customized manufacturing, there are unexpected wastage always taking place. A responsible factory will tend to buy more material, on his own dime, than whatever much the projected wastage was originally quoted to ensure that he has enough qty to deliver after everything is said and done. Because he anticipates if there should be more wastage on certain item than normal, he’ll still have enough to meet the qty. This is always the best practice. However, the down side is, if the wastage was normal, he’ll end up with more than what was ordered, hence, the overruns. Since he paid for these additional material on his own, he’ll want to recover the costs for this, especially if the overs are higher than 1%. This is reasonable.

In short, if we tell factory that we won’t buy any overs, then he’ll just buy enough material to cover the standard wastage. If everything goes well, great, we’ll have the qty we need. If not, we’ll get discounts for the shortage. So the promise to buy overs at “not to exceed” a certain percentage is really another form of insurance for the buyer to ensure that we get the qty that we need.

And one more point… A little bit of overs is fine. But when there are quite a bit, it creates additional shipping charges if they don’t fit the container just right.

The last thing I want is to create any misunderstanding between us. And I do not want you to see us as greedy bastards trying to make that additional 3% or 5% of overruns. That’s not what we are doing here. My loyalty is always on my customers’ side, not the factory. And I’m not going to get rich by selling overruns to customers. To me, this is a professional recommendation, not a way to make money.

I don’t want you to perceive this as a money making opportunity that we are creating for ourselves. This is really something to ensure the end result of manufacturing goes as good as planned.