Box Price vs. Cost-of-Use

CURRENT BOX PAPER GRADE

• Box Purchase Price:  $0.75/box

                      1000 boxes x $0.75/ea = $750.00

• Box Defect Rate:  15%

                      1000 boxes less 15% defect = 850 boxes 

• Adjusted Box Price:

                      $750.00 / 850 boxes = $0.8824/ea

• Defect Handling Cost:

                      150 boxes x $0.10 = $15.00/thousand

• Final Box Cost:

                      $750.00 + $15.00 = $765.00 / 850 = $0.90/box

NEXT HIGHER BOX PAPER GRADE

• Box Purchase Price:  $1.00/box

                      1000 boxes x $1.00/ea = $1,000.00

• Box Defect Rate:  0.2%

                      1000 boxes less 0.2% defect = 998 boxes

• Adjusted Box Price:

                    $1,000.00 / 998 boxes = $1.002/ea

• Defect Handling Cost:

                      2 boxes x $0.10 = $0.20/thousand

• Final Box Cost:

                      $1,000.00 + $0.20 = $1,000.20 / 998 = $1.0022/box

SUMMARY

The Customer perceives a 25% box savings using current paper grade when actual savings is only 10% after Cost-of-Use.  This comparison does not include other cost factors such as using extra tape, shipping damage claims, and lost customer satisfaction.  This scenario is common with companies where Purchasing is unaware of the consequence of their procurements, whether from distance between locations or internal non-communication (e.g.  shipping tosses defect boxes, tells nobody).