Firstly, I do appreciate that all companies should, indeed must, look to minimise their cost of goods. However, in recent times I have witnessed an increasing focus by purchasing departments on price and price alone.
Much of this price focus is driven by Senior Management looking for “cost down”.
Most people will be aware of the expression “If all you have is a hammer, everything becomes a nail.” I would like to add another expression to the melt; –
“The Price is NOT the Cost”.
As a Consultant with an Engineering background, I working with businesses who are looking for cost savings. But what do those look like? What most companies think of as cost is infact price; that is the amount of money you pay for a given part or service.
In that situation, the statement to a supplier is “we want a price reduction”.
At best this is short-sighted. When you start talking about mission critical items it can lead to bigger issues.
The Fiat car company was brought to its knees when they got a ‘bargain’ on some Russian Steel in the ‘70s. This steel turned out to be more steal than steel! The steel rusted so quickly that some cars were crumbling after only 2 British winters and some even failed the UK MOT Test and were deemed scrap after only 3 years. Sales of Lancias which had predominantly been made using this steel collapsed and the division withdrew from the UK market, returning after more than 20 years but under the Chrysler banner.
What did this ‘bargain’ steel cost Fiat? – impossible to say but certainly loss of sales/reputation will run into billions of dollars
In the manufacturing arena, there are very few companies who use Total Cost of Ownership (TCO) when they evaluate a supplier.
Time and again I see companies saying to their suppliers “what if I buy a year’s worth”. Well that might be fine if the item is very low value and small so it takes up minimal warehouse space (and assuming it doesn’t degrade in any way). When you get into large expensive objects, why would you want to hold large quantities? You must find space (and warehousing isn’t cheap), you have to count it, keep it warm, move it, transact it and pay people to do all of this.
All of these things cost so what initially seemed cheap, by the time you add on all the extras proves more expensive than a more considered option. And then there is the effect that these ‘cheap’ goods have when they hit the shopfloor.
If the raw material is of poor quality you can inspect/sort/accept or reject it but you won’t replace what isn’t there (unless you want to rework the part(s) internally with all the costs that go with it). And what do you do with the scrap parts if they are low value and the supplier is on another continent? This is not the best way to run a business AND can rapidly escalate operating costs
So sometimes it is better to ask a different question:
• If we pay a little more, what more can you do for us?
• Can you help us make our relationship more effective?
• What ideas do you have?
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