SCDigest
Editorial Staff
SCDigest Says: |
To do that, will those suppliers be cutting corners – and in reality add to what looks like a sweet deal a large amount of risk?
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Most supply chain managers understand, in theory, the concept of “Best Total Value” or “Total Supply Chain Costs,” but sometimes putting it into practice may be difficult. That may be especially so in the current economic climate.
Those two terms and others are used to describe the basic and fundamental concept that procurement organizations should focus on the lowest cost to the organization from a product they purchase, rather than simply the lowest “unit price” for that part or commodity.
As Dr. Ed Marien of the University of Wisconsin and his own consulting practice explained last year to SCDigest, “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.”
But most procurement experts believe that while the concept of selecting a vendor that offers truly the “best value” or “lowest total supply chain cost,” rather than just the lowest “price,” is generally accepted as a best practice, that mindset is, in fact, very difficult to put into practice in many organizations.
Why? There are several reasons. First, it may be difficult or even impossible to really ascertain what the other operational costs are associated with using a given vendor’s products. For example, what really is the value of an effective Vendor Managed Inventory program offered by one vendor?
Second, those additional costs are less visible than purchase price, and often open to more subjective assessments than the black and white unit price.
Third, procurement managers are often incented/evaluated on their ability to manage costs at the unit price level, versus previous years and/or some commodity index, not total cost or best value.
(Sourcing
and Procurement Article - Continued Below)
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