| Ed Marien Says:
| The high majority of buyers look at the job they do as being one of going out and getting the best price. They equate price paid with the cost to the firm, and they are not identifying the elements of cost that are in the supplier’s price, and then also not analyzing the internal costs the buyer experiences in purchasing and using the item.
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Dr. Ed Marien is currently president of Marien & Associates in Lodi, WI, and emeritus professor at the University of Wisconsin and director of its Supply Chain Logistics Management program. He has done a substantial amount of research and writing on a variety of purchasing and strategic sourcing strategies. He discussed his insight and perspective on the concept of “Supplier-Price-Cost Management” in this interview with Supply Chain Digest.
Supply Chain Digest: What is the concept of Supplier Price-Cost Management all about?
Marien: Well, there are three things in that title. First “suppliers” – companies responsible for keeping buyers in the supply of products when needed at the right cost. Second “Price-Cost” – the two terms go together. There are several aspects of price, of course, but the key concept has to do with looking holistically at the buyer’s side of costs, not just the supplier’s price. It’s obviously not only purchase and delivery price that matters, but your internal costs for acquiring, managing and using that product or service.
Finally, there’s “management”: that means really understanding these price-cost trade-offs, and dedicating the resources to do so effectively. It’s not just sending your buyers out to get the best price, it’s also giving them the training and support they need to go out and get a better understanding of cost.
Supply Chain Digest: How well is this concept understood among procurement and purchasing practioners?
Marien: The high majority of buyers look at the job they do as being one of going out and getting the best price. They equate price paid with the cost to the firm, and they are not identifying the elements of cost that are in the supplier’s price, and then also not analyzing the internal costs the buyer experiences in purchasing and using the item.
Supply Chain Digest: Give us an example.
Marien: Sure, just take something as simple as buying a product “FOB Delivered,” meaning you are buying the good with a delivered price. Right there, as you begin to look at the delivered price, there are often opportunities to analyze and negotiate to ultimately end up with a lower total cost.
A lot of buyers will say, “I don’t want to mess with all these cost components, I just want to buy it delivered. Give me your best price at my door.” What that often allows a supplier to do is to pad the cost elements to come up with that delivered price without breaking out all the price elements.
If I go further, you can look at the cost of carrying inventory. Say the supplier sells in quantities of 100, but you only need 10, so you buy the 100, use 10, and keep the other 90 in inventory for awhile. Obviously, the buyer is increasing its total costs by carrying that inventory.
Supply Chain Digest: What prevents companies and buyers from thinking in these terms? Is it a skill set issue, a role definition issue, a mind set…?
Marien: Part of it is clearly related to skills. Buyers have often just not been trained to analyze total cost of ownership. I’ll give you another example of that.
As buyers begin supplier price-cost management analysis, they start to look at cost structures, or what the real cost drivers are that effect the price the supplier charges.
There is labor, materials, energy, R&D expense, other overhead, etc., all the elements that go into their costs. Many buyers don’t have the skill sets to break down the cost of the product, breaking down the total value added costs of making and delivering the product.
A second thing is that as buyers go through the requisition and supplier selection process, many have little say in the specifications for the things that they are buying. They are passing along a requisition – in some cases, the ultimate user of the product may even have identified the supplier.