Features
Reducing Cost of Goods
On average, 47 percent of the cash disbursements our industry makes goes to cost of goods. Our managers make significant efforts to reduce the cost as fast as reimbursements decline. Our manufacturers also make significant efforts in response to the need for lower cost of goods. It is like we are stuck in a cycle — reduce reimbursement, reduce cost of goods, around and around.
There is, however, an approach to reducing the cost of goods that can yield more savings to those who adopt it, but it is a departure from what has become the norm.
Of course the downside to adopting new ways of doing things brings risk and work. But the rewards can be enormous. Consider some new approaches that paid off well, like automobiles, airplanes, oxygen concentrators and so on.
This new approach starts by redefining "cost of goods." We generally think of goods as physical items, i.e. bedside commodes, lift chairs, walkers and the thousands of other items we acquire. The reality is that goods are much more than metals and polymers: Goods include activities.
After the manufacture of an item, there are at least 16 activities — each consuming time and, thereby, cost — that a manufacturer incurs in getting the goods to the provider. All of these activities are included in the cost of goods. In addition to the manufacturer's activities, there are additional activities required of the provider, each consuming more funds but not accounted for in cost of goods.
The manufacturer's activities included in the cost of goods are:
| Purchase Goods | Receive Goods |
| Post Invoice | Pay Invoice |
| Stock Goods | Warehouse Goods |
| Enter Order | Manage Credit |
| Pick Goods | Pack Goods |
| Ship Goods | Send Invoice |
| Collect Past Dues | Post Cash |
| Reconcile Cash | Make Bank Deposit |
In addition to the activity costs that are included in cost of goods, the manufacturer includes the costs of occupancy, insurance and capital.
The price providers pay can and should be relevant to the activities they use. Further, providers should know that they can affect the cost of the activities that they actually use.
