Is Using a Cheaper Supplier Actually Better?

When you look at Procurement in its basic form, it’s all about buying something because that supplier is good or because that supplier is cheap.

In Procurement, you always have to be cost-conscious. You always should have the financial health of your organization at the forefront and It is your responsibility that you don’t allow your supply base to enjoy excessive profits or power at the cost of your company.

 

So, is cheaper better?

 

Not necessarily. The problem is that price reductions alone rarely equate to real cost savings. This is because they only apply to unit costs and have limited or no effect on the hidden costs associated with inventory management, shipments, product redesigns, product failures, or unscheduled downtime, to name only a few of the risks associated with the cheapest price.

On the other hand, any CFO will tell you that real cost savings should be reflected in the company’s bottom line. So if we measure the bottom line and this is not the case, there are no true cost savings. Worse, some price reductions may actually have the opposite effect.

This is indeed the case when the low-cost supplier delivers the parts too early or too late. Having items sitting idle on the shelf will undoubtedly increase your cost of inventory, and delivering the merchandise too late will likely result in lost business or increased transportation costs for any emergency shipments, or worse, costly downtime.

As an example: A supplier (we won’t name names) won a Public Procurement bid on price for a government contract, beating out a competitor who rated higher in the initial evaluation. However, the winning supplier didn’t meet the initial estimated targets and this resulted in an extra cost of over 6 million euros with a delay of 3 years on the project (it’s still ongoing). The requirement also required smartphone technology for customer use which is no longer usable as it is now outdated.

 

So, What fits best?

Most suppliers aim to differentiate their products or services. You should seek to understand those differences, what value those differences have to your organization, and which offering is the best overall fit for your organization, price and other factors considered.

Fundamentally, Procurement needs to view the supply chain as a whole and adopt a more collaborative approach with suppliers to determine the optimal mix of unit price, performance, reliability, and supplier responsiveness, as well as speed or time-to-market, because ultimately this is what drives company profitability.

 

In short, you should select a supplier as that supplier has proved that it is the best fit for your organization, not because the supplier was the cheapest. Always qualify new suppliers in a way that is appropriate for the value and criticality of the purchase. This may even mean dating the supplier before marrying them.

 

Post by: Koble
09/05/2017