|Latin America II 1996
|Total Procurement Cost Goes Beyond Price!
As many executives worldwide have discovered to their dismay, purchasing telecommunications equipment and supplies based on lowest price alone may be a very costly mistake. We decided to discuss why this is so with an expert on total procurement costs in the telecommunications sector, Bradley Kaplon of TESSCO Technologies, a total source supplier to the cellular, paging, PCS, and two-way radio industry.
Isn’t purchasing products the easiest part of getting a job done? At first glance, procurement looks like a pretty simple job. High prices are bad, low prices are good, right? Well, not exactly. Although smart buyers always focus on finding the lowest price for the items they buy, price is just one of a number of factors that determine the true or total procurement cost (TPC) of buying and storing goods. These “hidden costs” can dramatically affect your bottom line long after the sale is consummated. Ignoring them can be a costly mistake. How would a smart buyer find these hidden costs? By breaking down the purchasing process into its various components, you begin to see the trade offs associated with best price shopping. The first component, shopping time, is a good example. To get the very best price on each of the items you need, you might have to shop four or five different sources for each item. As your needs increase, your shopping time increases, too. But that’s just the beginning. As you place orders with a growing number of sources, your internal administrative costs increase, too. Consider the incremental expense of paperwork like purchase orders and check writing; of shipping, tracking, and expediting the additional orders; of receiving and confirming the shipments; and of correcting the inevitable errors like short shipments, wrong items, and damaged goods. But aren’t these multiple-source purchasing costs relatively minor when compared to what you’d save by shopping for the best price? You might think the hidden costs are a small price to pay for the big savings you’ve gotten by shopping around. But to get significant savings on any single product, you often have to buy in large quantities, particularly if you are dealing directly with the manufacturer. That means a large up front outlay of cash, and the transferred burden of inventory storage and control when that big shipment hits your dock. So instead of working for you by earning interest or purchasing needed equipment, your money is tied up in inventory and high priced storage space, plus higher taxes and insurance on your stock. In addition, you’ll need more time, effort and manpower to keep tabs on your expanding inventory. And you’ll see increased loss due to inventory shrinkage and pilferage. Suddenly that simple procurement job just got a lot more complicated and expensive! I bet many buyers have never fully thought through how much it costs to shop for the best price on each of the products they need. Is there an easy way to avoid all those costs? Your best defense against hidden costs like these is a reliable, total source supplier. Buying everything you need from a single source gives you the best total economic deal by reducing your internal administrative efforts to the bare minimum. That simplifies your life, reduces waste and the chance for error, and lets you be more profitable. This strategy is particularly applicable when you are buying a lot of different types of products, your purchase frequency is high, the purchasing transaction tends to be very involved, or your after-sale support needs are high. How can adding a middle man to the purchasing process make buying easier and more economical? Not at all like the old fashioned “middle man,” today’s total source supplier specializes in buying and inventorying huge quantities and broad selections of products. That lets the supplier sell and ship you just the quantities you need, when you need them, economically. While some individual item prices may be higher, your total cost will be significantly lower. In essence, the total source supplier becomes your personal warehouse, reducing the hassles and expense of storing a large inventory yourself, and freeing up your cash reserves for more important things. By working together with a trusted supplier to lower total procurement costs, a smooth purchasing “system” will evolve naturally. And this custom system will promote better communication, better service, and improved satisfaction all around as the two organizations shape a mutually beneficial partnership. Can you be more specific about the savings to be realized with a single source supplier? We conducted an informal study to compare the total procurement cost of two identical orders one placed through my company, TESSCO, and the other through a combination of sources based on best price shopping. It was a typical order made up of several products from several manufacturers. The results may surprise you! Obviously, the savings with a single source supplier would become significant over time. Absolutely! A single source supplier always tries to offer the lowest possible price, but it focuses even more on doing what it takes to lower total procurement costs. Take world-class service, for example. It’s hard to put a price on service like this. But when your job or your reputation is on the line, there’s simply no substitute. Are there times when you can save a little money by aggressively shopping price? Sure. But you have to ask yourself if all of the additional time and effort – the hidden costs of buying strictly on price – are worth the difference. Can you meet the necessary minimum order? Execute the administrative efforts efficiently? Store and control a large inventory cheaply? In most cases, the answer to these questions is “no.” That’s the time to pick up the phone and call a total source. Because total procurement cost goes well beyond price.