~Dr. Edwards Deming, 4th Leadership Point
[tweetmeme]A young production manager, John, is working for a progressive manufacturing company. They are embracing the Deming philosophies. The VP of Purchasing is preaching total cost and states that the days of purchasing based on price alone are gone. John is sitting in his office. One of his suppliers who he isn’t particularly pleased with knocks on the door and enters. “Have you heard the great news? We just signed a 5-year contract and will continue to be your sole supplier.” John’s reply is simple: “No I hadn’t. I didn’t even realize it was contract time again. Congratulations.” But he wonders, “How can this be? I run the largest manufacturing department in the company and no one asked me what I think.”
This is an example of a company that has good intentions. Yet they did not really consider everything that goes into the total cost. Their goal is to build long-term relationships with their vendor and to make decisions based on total cost rather than just the price tag. The problem is that the purchasing department sees the price tag. They also see some other factors like the locations of the vendors manufacturing plants. But they do not see many of the factors that play into the total cost.
Purchasing managers need to reach out to the users to understand many of the components of the total cost and to make an informed decision. A few thoughts to consider when making a purchasing decision for your company:
- Quality – it can be difficult to put a price on quality yet it must be a consideration. Poor quality can adversely affect the quality of your finished product and yield while increase manufacturing costs. The user should be able to articulate the impact of poor quality if you chose to purchase from the wrong vendor.
- Customer Service – Late orders and poor responses when you have problems will have a negative impact on your business and increase your costs. Will this vendor provide the service you need to reach excellence in your process?
- Maintenance Cost – Equipment requires maintenance. This cost can have a
dramatic impact on the total cost of ownership. The cost of spare parts and the level of maintenance required both play a role. Standardizing equipment will help reduce the cost of parts and maintenance. Southwest Airlines does this very well. They have 550 aircraft in their fleet. All are Boeing 737’s.
- Operating Cost – Equipment reliability and the cost of consumables also impact the total cost. Equipment downtime is very expensive. The cost of downtime can cost your company more than the original price tag if your lines are going down often. Look to organizations already using the equipment to estimate operating expenses.
- Training – Most new equipment and software programs will require some level of training. Standardization will reduce training costs as well.
[tweetmeme]Purchasing decisions that do not consider factors like Quality and ongoing operational expenses are short sighted. Decisions based on the purchase price alone can cost your company much more than you think you are saving. Have you seen purchases based on price alone? How did it impact your business? Are there other factors you consider when purchasing?
The Lean Leadership Blog
Written for www.consumergoodsclub.com
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