Whether you’re evaluating material requirements contracts, or shopping your purchase orders, when do you accept the lowest bid? The answer is simple, ALWAYS. You should always accept the lowest cost provider for your material requirements, resale products, and business supply items. That said, it is important to appropriately evaluate their proposals beyond the unit price quoted. Lowest cost is frequently not the lowest price. When evaluating purchasing proposals, you must understand the “Total Cost” of doing business with your suppliers.
Four factors when assessing supplier proposals
- Unit Cost – This is the easiest one. We often use unit or product cost when evaluating proposals. It is very important we maintain competitive costs in order to efficiently run our businesses. When other factors are met, we should base our purchasing decision on unit cost.
- Compliance or Conformance – Whether you’re purchasing raw bars of a metal alloy or electronic components, your product specification should clearly define your expectation. Your specification will create the legal doctrine to protect your business if something goes wrong. A product may look and feel like it meets your requirement, but inferior products or materials incorporated into your products may not be apparent for several months or years in the field. To protect your business, establish good quality procedures to evaluate new suppliers and have the test systems and processes to check sensitive materials as they enter your business.
- Supplier Performance – It is important to measure your supplier performance on an ongoing basis. If your supplier is unable to meet delivery schedules, or have issues delivering products that pass your quality receipt inspections and / or tests, then your cost of doing business goes up. Your purchasing department’s primary objective is to meet the production / customer demand. If lack of product shuts down the plant or reduces revenue, the purchasing department is held accountable. When we do business with unreliable suppliers, we tend to cover for them by adding safety stock to our material requirements. This adds unnecessary dollars to our inventory, ties up our cash and could create liquidity issues. I have personal experience with a company that maintained $1 million in extra inventory to cover poor supplier performance.
- Product Image / Acceptance (Resale) – Your supplier’s brands and their image may be important to your marketplace. Sometimes competing resale products may meet all the specification and performance requirements, but one is embraced and accepted by the marketplace, and one is not. When you produce high quality products, you want your product to be associated with high quality companion products. Sometimes the only difference is perception and marketing, but it is not up to you to promote your suppliers’ products. It is important to partner with suppliers that meet your company’s image, are accepted by the marketplace, and share your value proposition.®
Once you have established your purchasing criteria, qualified your suppliers, and coordinated your products to meet your sales and corporate strategic objectives, then unit price becomes a critical factor. Relationships and other soft criteria should be ranked below the above factors and especially unit cost. Before you make your purchasing decision, you must understand your “Total Cost” of doing business with your suppliers in order to effectively manage your business.