Would You Purchase Based on Price?

End the practice of awarding business on the basis of {the} price tag.  Instead, minimize total cost.

~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
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    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?

Best regards,

Christian Paulsen

The Lean Leadership Blog

Written for www.consumergoodsclub.com

Please leave a comment below if you liked this article. You can also connect on LinkedIn, follow me on Twitter, subscribe via e-mail (right side bar), retweet, digg, or stumble this article. Your feedback is appreciated.

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About Christian Paulsen

Christian Paulsen is an Executive Consultant with 20 years of Lean Manufacturing. Chris adds value to organizations by driving process improvement and bottom line savings. Chris intends to help others by sharing the lessons learned after a quarter century of operational leadership, marriage, parenting, and even longer as a Cubs fan. Your comments on this blog are welcome. You can also connect with Chris via LinnkedIn, Twitter, and Facebook in the right sidebar. Chris welcomes your comments. Christian's professional services are available by contacting him through LinkedIn (right side bar)
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8 Responses to Would You Purchase Based on Price?

  1. Gerhard W.Kessler says:

    We are almost in 2011 and I wonder if this article wasn´t written 35 years back as I started as a purchaser . At that time all comments were relevant as the buyers only knew the word “discount”……….BUT today I would expect that every company hires intelligent materials-pros who understand the product as good as the R&D-manager and every process as good as the supplier and finally, should understand related cost better than any controller ……..which sometimes is a problem as those do not understand the relationship by a more expensive part vs. a process which has higher quality and lower associated cost. As example use LED-lights (tubes,panels and bulbs) to replace neon-lights.
    It is not just, that the higher price can be balanced against a future saving of energy cost- all other cost like changing the tubes by the maintenance or even external team and cost for waste dumping of the neons need to be added as well as the lifetime of the LED lights……..but now try to explain that you are going to replace not just the tubes and bulbs – no, you like to lease a light system-they will be lost !
    Gerhard

  2. Gerhard,

    Thank you for the feedback. One would think that this is old news. The post could have been written 35 years ago and is in the spirit of Deming’s teaching from that era. He was probably teaching this even before then. Unfortunately this principle, along with other Deming and Lean principles, are not yet universal. I’m not the only one who is still seeing short term decisions and decisions made in a vacuum. Thanks again.

    Chris

    • Chris
      Just to be clear ….I did not say that your report was wrong, I just wonder that there are still so many companies allowing this old fashioned practice.And yes, you are right : Have they ever read Deming ?? Are they really willing to walk lean ? As this requires disciplin on all levels, the answer is “sometimes”
      On the other hand I am happy that there are still clients who need a helping hand otherwise I would not have any business 🙂
      Gerhard

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  4. Thanks, Gerhard. Your comments are appreciated.

    Chris

  5. Rachel says:

    This was a great piece. Made me think of a similar situation, while not on such a grand scale, was equally frustrating. I used to work for a small high-fashion magazine. I was in a fairly low-level position. We used to distribute signage to our clients of their appearances in our magazines and the laminated boards, quite honestly, were not very good – usually cloudy lamination with bubbles – and ESPECIALLY considering that we were a fashion magazine, “perfection” is expected by our clients. I had spoken to the sales person a company I wanted to try out. I explained the situation. She offered to do a job for us at the same price as our current vendor. They delivered a really top-quality product. Once I showed this to my boss I was able to make a case for changing vendors despite the slightly higher cost.

    • Rachel,

      Thank you for your comments and insight. It is interesting to see how broadly the principles of Deming and Lean apply. I normally think in terms of manufacturing since that is my environment and enjoy hearing of examples like yours outside of that realm.

      Happy New Year!

      Chris

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