Stop Being So Cheap! You're Bleeding Your Company Dry
POST DATE Mar 06, 2015
AUTHOR Udo Jahn
I saved some money yesterday, but today I am bleeding money all over the floor.
I got a great deal on a piece of equipment awhile back, but today I am hemorrhaging money because of that great deal. I went for something that I was told was “just as good”. I was told that the equipment had a lot of customers using it. What they conveniently failed to tell me was that all the other customers bought it on price only, and not on quality or the ability of the supplier to provide support. In total I saved $100,000 on the purchase. That seems like a lot but in the end I spent more than $100,000 on repairs.
There’s also the cost of downtime to consider, which most likely exceeded $200,000 in lost productivity. When I talk about lost productivity, what I mean is the amount of billable hours we lost due to repairs and downtime. I don’t know about you but when I saw this approximate number I was really upset. I was upset with myself because I had obviously made the wrong buying decision. Shame on me!
I know I am not the only one who has made a decision to save money that only ended up costing a lot more in the long run. I was having a conversation with a customer awhile back about the new sawguides that I had sent him. He mentioned that due to the accuracy and quality of our sawguides, he went from doing a saw change every day to doing one every second day. I dug a little deeper and asked him if he thought the old ones needed to be changed every day only because they were worn out, but he said no, his old sawguides still had to be changed every day even when they were new. In his opinion, the accuracy of Modern’s sawguides was the primary difference. I was kind of taken aback by the massively positive impact of doing a saw change every second day instead of every day. I wanted to question the customer further but thought better of it. No one likes being reminded of a previous bad decision, so I decided to continue focusing on the good: the customer’s huge productivity gain.
But I was still curious. So, I called up a few other sawmills to actually see how much money was saved by a decrease in the amount of saw changes. I decided to focus on downtime. I found out that if an edger is down, the cost per minute (yes, it is measured by the minute!) ranged from $100 to north of $300. Let’s say the average is $200. I stopped for a moment, a bit in awe, because this cost per minute is a big number to a company like mine. I also found out that the average saw change took about 30 minutes or more depending on the edger. Now I was really intrigued, so I decided to get my calculator out.
I estimated that the sawmill worked 5 days a week and 50 weeks a year, which is probably a conservative assumption. This meant that there were 260 working days in a year. To go from a saw change every day to every second day was to go from 260 to 130 saw changes a year. How much money was saved by this?
130 (saw changes) x 30 (minutes a saw change) x $200 (per minute) = $780,000
This calculation froze me. I redid the calculation three times but the number did not change. As the size of the number began to sink in, I thought about doing a more accurate calculation about how much money I had lost during the downtime caused by my previous “cost-saving” milling machine purchasing blunder. But then I thought it better to leave that number uncalculated because I did not want to be sick. The worst part is that my loss, whatever that number may be, came directly out of our profits. Similarly, the savings my sawmill customer saw by cutting his saw changes in half went directly to increasing his profits.
The sawmill customer spent more money at the beginning in order to buy the most accurate sawguides. However the savings that came from the decrease in needed saw changes more than made up for the initial purchase, making it a great investment to keep profits high for years to come.
What this really enforced for me is that buying decisions which look at only the cost of the product may not be the best way of doing things. You have to ask yourself, “What are the real savings?” In this case, spending more on the most accurate sawguides really did save a lot of money.
This lesson has really influenced how I am going to buy things in the future. Price isn’t everything, and the cheapest deal out there is probably cheap for a reason: because it won’t pay off in the long run.