The ol’ Restocking Fee Play
Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant
The wisdom of the so called, “Restock Fee” charge generates a lively and fascinating discussion in purchasing and sales negotiation seminars. A threshold question to resolve, however, is its justification. Sellers insist that the charge covers the expense of putting the product back in stock but is such justification ever produced or is it buried in the “standard charge” pabulum. Customers suspect, quite correctly in many cases, that the charge is little more than a thinly disguised penalty for a canceled sale.
Professional buyers are a cost focused group; as such, we look to a cost justification for the restocking charge. We certainly do not want to inflict financial harm on a good supplier but neither should we tolerate being hosed by an arbitrary charge.
In order to evaluate the reasonableness of the Restocking Fee, let’s first establish the parameters and then look at how the standard 15% Restocking Fee applies to two situations.
- A common steel commodity with no fabrication or value added sells for $1.00 per pound
- Our sales department obtains an order from a new customer that requires purchasing to buy this steel
- Purchasing buys the steel but sales informs that the customer has cancelled the order, forcing us to return the steel before we even unload it
- The supplier charges a 15% ‘standard” restocking fee
Two situations:
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- The purchase price of 10,000 pounds of steel @ $1.00/lb = $10, 000. At a standard 15% Restocking Fee, the charge is $1,500.
- The purchase price of 20,000 pounds of steel @ $1.00/lb = $20, 000. At a standard 15% Restocking Fee, the charge is $3,000.
Is this reasonable?
The only way to know is to resort to Cost Analysis to determine the reasonableness of the charge. We investigate and learn the following facts that represent the costs involved.
1. Delivery Either steel order is delivered by a $100/hour truck and driver that requires a one hour round trip Cost $100
2. Handling Either steel order is loaded and unloaded by a $100.hour overhead shop crane; allow 15 minutes for each pick or one half hour total Cost $50
3. Administration There is an embedded cost of doing business. Assuming this transaction was accomplished the old fashioned way , and not via electronic or P-Card means, let’s allow $100 for the transaction costs
4. Opportunity the steel is not special and easily reusable so a $10,000 order that is unavailable for one hour. Assuming a 10% borrowing rate, $10,000 @ 10% is $1,000 per year, $2.73/day or $0.12/hour
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Total cost
1. Delivery $100
2. Handling $050
3. Administration $100
4. Opportunity $000.12
TOTAL $250.12 and, this is for either order!
The supplier is charging the customer about 6 times its cost for the $10,000 cancelled order and 12 times for the 20,000 pound cancelled order. If we assume a 5% profit on the sale, it is clear that the supplier made more by canceling the order than if it had been completed.
It is time to call the supplier in to negotiate doing business on a more mutually beneficial cost based business. Lay out your cost facts and ask for their explanation. This is an ideal opportunity to discuss business going forward and using a cost up versus price down basis of negotiation.
What do you think?
This is but one model for determining the cost justification for a Restocking Fee. Whether you are a buyer or seller, how do you handle these situations?