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When it comes to labels and flexible packaging, the cost of the part is a small component of the Total Applied Cost (TAC) of the part. Budget owners should consider several elements of what it costs to get the product accurately labeled, packaged and routed to the shipping dock. Hopefully, this blog will give you some perspective of what makes up TAC.
Total Applied Cost is an important consideration to determine true cost!
TAC is far more than the actual cost of the label or flexible packaging part. We condensed TAC to nine categories of cost besides the actual cost of the part. All these cost elements (in the numerator) usually interest the budget owner of the production facility and impact downtime, efficiency and ultimately the net run speed of the production line. Further, these costs should be added to the extended cost of the label or flexible packaging part.
Costs easily overlooked include obsolete inventory and excess inventory. Typical root causes for obsolescence include: component or ingredient changes, regulatory compliance changes, brand redesign, or the product is just not selling like forecasted. You can spot excess inventory in the warehouse by using the “white glove” test. Simply slip on an inexpensive pair of disposable white gloves and take a stroll through your label storage room. Slide your finger across the top of the label cartons and notice the darkness of the dust on your finger: the darker the glove, the higher probability of excess inventory/obsolescence. These parts should be scrapped and added to extended costs in the numerator. No reason to hang onto it and pay for storage space.
Finally, don’t overlook how “quantity” impacts TAC unit cost…True unit cost is based on quantity used NOT quantity ordered. You could easily understate the real TAC by using Quantity ordered in the denominator. Closely managing inventory levels will pay big dividends and have a significant positive impact on reducing real TAC.
A relevant story that makes the point about the importance of Total Applied Cost is an automotive aftermarket company who makes and distributes remanufactured automobile power steering units. The units themselves were labeled with a high end PET label/resin TTR ribbon combo and moved down the assembly line to the packaging area where another paper thermal transfer label was generated for the shipping carton. Due to a number of reasons, including poor communication, there were a number of mix-ups of the finished units. This caused both shadetree mechanics and auto repair shop personnel serious heartburn, major league frustration, especially when the Chevy power steering unit they were about to install turned out to be for a Ford! You can only imagine the cost of restocking/replacing products and customer dissatisfaction!
After careful analysis by the assembly plant, the solution to the problem was to redesign/implement the label at triple the cost. Yep, 3 x’s the cost of the previous label! Both the actual power steering hard goods label and the shipping carton label were made out of PET and printed on one TTR label, with a split liner. That allowed the shipping label to remain adhered to the unit, removed, and applied to the shipping carton as the re-manufactured unit was inserted into the carton. When this solution was presented to the ‘purchasing agent’, a person whose yearly review was based on cost reduction of their commodities, the quick answer was that no, a tripling of label costs was absolutely not acceptable. When the proposed solution was presented to the Operations Manager however, he took a look at it, thought about it for about 60 seconds, and asked how long it would take to implement it and whether he could pay a rush charge to get it done more quickly. Mislabeled power steering units dropped almost to zero once the program was dialed in. Even though the actual label cost tripled, when factoring in the cost of mislabeling, receiving returns and quick replacement shipping costs, the new label design was far less when considering the Total Applied Cost.
So don’t forget to consider that it’s not just the unit cost of the label or flexible packaging part but the Total Applied Cost of the quantity used. It can make a big difference to the organization!
Special acknowledgment to former AWT employee Dave Olson who contributed to some of the concepts in this blog.