So what’s the fascination with price?

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?

Published by Lean 4 Business

An experienced Interim OpEx Manager with a solid history of success as global consultant for some of the world’s best-known companies e.g. GlaxoSmithKline, Tata Steel, Lamborghini, Nokia. On-staff go-to resource in Operational areas. Has managed teams of >250 people. Strong background in Engineering, able to rapidly assess issues and fix them, fast decision maker. Builds and leads teams and relationships that meet and exceed goals and expectations. Highly adept at developing and implementing initiatives that enhance business efficiencies delivering game-changing performance and significant reductions in operating costs. Demonstrated skills in overseeing projects from concept to completion delivering huge financial benefits. Expert in Lean, Six-Sigma, Theory of Constraints and Operational Excellence. English native speaker, good French, conversational Italian and beginner Arabic. Member of the Advisory Board - Pharmaceuticals and Technology Practice™ Interim Partners™ Areas of expertise: Operations Management, Manufacturing management, Production Management, Supply Chain development, Production Engineering, Engineering Management, Asset Management, Process & Equipment redesign, Interim Management, Performance Improvement/Transformation, Business Start/Scale-up, Change Management, Operational Excellence, Coaching, Mentoring, Supply Chain Specialty: Getting stuff out the door on-time and at quality/cost. "Works hands-on across businesses to deliver game changing outcomes."

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