GM504 Unit 8 Scanning Cost and Benefit Analysis Example

One Hundred Forty-Two Dollars a Correction: A Unit 8 Cost and Benefit Analysis of Scan-Confirmed Picking

[Student Name]

Purdue University Global

GM504: Organizational Excellence and Change

Unit 8 Cost and Benefit Analysis

[Instructor Name]

[Date]

Ridgeway Building Supply, its costs, the vendor quote and every figure are composite and illustrative; the frameworks and sources cited are real.

Pricing a Correction

The controller and I priced a typical correction from twenty corrections traced in detail during the baseline. A redelivery uses a truck and driver for an average of 1.4 hours at a loaded cost of about $56 an hour, or $78. Re-picking the correct item and returning the wrong one to stock takes about forty minutes of yard labor at $27 an hour, or $18. Issuing a credit memo, updating the order and handling the customer's call takes about forty-five minutes of billing and sales time, or $22. And about one correction in five involves product that cannot be resold, such as cut-to-length material or damaged returns, which averages $24 across all corrections. The total is $142 per correction.

Table 1: Current Cost of Quality

Cost-of-quality models divide spending into money spent avoiding errors, money spent checking for them, and money lost on errors found before or after the customer sees them, a structure Juran's work made standard (Juran & Godfrey, 1999). The classic finding is that organizations spending little on prevention spend heavily on failure (Schiffauerova & Thomson, 2006). Ridgeway's current spending fits that pattern.

Prevention spending is close to zero. There is no structured training for pickers beyond shadowing, and no one maintains bin locations. Appraisal is modest: drivers count items with the customer at delivery, which takes a few minutes per stop and is part of their normal route time. Internal failure, errors caught before the truck leaves, such as a loader noticing a wrong item, costs about $1,100 a month in re-picks. External failure, errors that reach the customer, is the largest category by far: 139 corrections a month at $142, about $19,700 a month or roughly $236,900 a year.

Ridgeway spends almost nothing preventing wrong deliveries and nearly a quarter of a million dollars a year correcting them after customers find them.

Table 2: Costs of the Proposal

The one-time costs come to $23,556. The directed-moves software module costs $14,000. Configuration requires sixty hours of the vendor's time at $85 an hour, or $5,100. Training takes two hours for each of 38 yard employees at $26 an hour, or $1,976. And the item master cleanup takes eighty hours of the inventory clerk's time at $31 an hour, or $2,480.

Recurring costs come to $8,848 a year. The module's annual license is $5,208. Weekly location audits of fifty bins take about two and a half hours at $28 an hour, or $3,640 a year.

Benefits: Expected Case

The improvement proposal predicts about 44 fewer corrections a month: 36 fewer wrong-item corrections and 8 fewer short-quantity corrections. At $142 each, that saves $6,248 a month, or $74,976 a year. After recurring costs of $8,848, the net annual benefit is $66,128, or about $5,511 a month. The one-time investment of $23,556 is repaid in about 4.3 months.

Benefits: Pessimistic Case

Predictions in improvement projects are often optimistic. If scanning delivers only half of the predicted effect, 22 fewer corrections a month, it saves $3,124 a month, or $37,488 a year. After recurring costs, the net annual benefit is $28,640, about $2,387 a month, and payback takes about 9.9 months. Even in this case, the investment is repaid within the first year.

What Would Make It Not Pay

The proposal would fail to pay within two years only if it reduced corrections by fewer than about 12 a month, a quarter of the predicted effect. At that level, monthly savings of about $1,700 would barely exceed the recurring cost of $737 a month and would take roughly two years to repay the one-time investment. Given that the root cause analysis traced 38 wrong-item corrections a month to mismatched bins, an effect that small would mean scanning failed to fix bin records at all.

The Benefit Nobody Can Price

The largest benefit may be one the analysis cannot measure reliably. The roofing contractor who threatened to leave two winters ago buys about $400,000 a year from Ridgeway at a gross margin of about 22 percent, so losing that account alone would cost about $88,000 a year in margin. Several other contractor accounts are of similar size. Wrong deliveries cost contractors lost crew days, and a contractor who loses two days in a season may move the account without warning. Deming observed that many of the most important figures in management are unknown and cannot be known, such as the effect of a dissatisfied customer on future business, and that managers who rely only on visible figures will misjudge quality (Deming, 1986). This analysis does not add retained accounts to the payback, but it notes that a single retained account would exceed the entire cost of the project.

Conclusion

Ridgeway's current cost of quality is dominated by external failure, about $236,900 a year. Scan-confirmed picking costs $23,556 to install and $8,848 a year to run. In the expected case it repays its cost in about 4.3 months; in a pessimistic case with half the effect, in about 9.9 months. It would fail to pay within two years only if it removed fewer than a quarter of the predicted corrections, and the value of retained contractor accounts, which the analysis does not count, would add considerably to the return.

References

Deming, W. E. (1986). Out of the crisis. MIT Press.

Juran, J. M., & Godfrey, A. B. (Eds.). (1999). Juran's quality handbook (5th ed.). McGraw-Hill.

Schiffauerova, A., & Thomson, V. (2006). A review of research on cost of quality models and best practices. International Journal of Quality & Reliability Management, 23(6), 647-669. https://doi.org/10.1108/02656710610672470