WHAT’S MY REAL COST?
Even before you enter the purchase price for an item on a purchase order, you need to consider at least some of the following factors that can bring on added expense:
The supplier’s reputation for service before, during and after the sale. A problem at any of these points in the procurement process that is not addressed in a timely manner can result in unexpected project delays, system downtimes, penalties, claims and other things that can bring on added cost.
The availability of a supplier’s local representation to address problems during installation or while the product is in service. Again, a supplier who is not available when needed can mean undue delays. Additional damage to systems or property may result if a failure is not corrected as quickly as possible by someone located nearby.
Availability of local stock, especially repair parts and accessories. Without this availability, downtimes can be extended, cutting into production revenue or increasing maintenance costs.
Supplier’s financial viability, which provides assurance of long-term support and honoring warrantees. Evaluating agents, representatives or any other entity that stands between operations and the manufacturer can have a detrimental effect on whether or not a warranty will be honored by that manufacturer. Often an item purchased outside a manufacturer’s authorized distribution channel will be refused warranty service or cause additional cost for repair or replacement.
Quality and professionalism. How the entire supply channel supporting an item acts can have an enormous effect on the level of customer service and support provided the end customer, especially over the long term.
The manufacturer’s commitment to a market segment. If the manufacturer’s focus is on another market or geographic area and its staff is not versed in the concerns and needs of the purchaser, the best product may not be selected.
Many of the foregoing considerations cannot be assigned a dollar value. Yet if a shortfall occurs in any one of them, it is almost assured that an unintended cost results. The old adage, “Pay me now or pay me later” tends to ring true in such circumstances, as does “if it sounds too good to be true, then it probably is.”
Note that the foregoing considerations do not do much to help a purchaser arrive at a meaningful cost comparison for one item versus another. However, constructing a matrix to rate all the brands to be considered, and then placing the items in order of likelihood that item will cost more over the long haul, gives a sense of true cost.
In constructing such a matrix, brands being considered could be one axis, while the other axis might list key words that represent each parameter to consider. In addition to the parameters suggested above, the list also might include:
- Supplier’s reputation for products/services that last or perform with minimal attention.
- Supplier’s reputation for products/services that are easy to install or apply with minimal training.
- Supplier’s reputation for products/services that save energy or lead to more efficiency in an application.
- The degree to which the product/ service is proven in years of field use—or lacking this, the reputation of the supplier’s products/services to last for extended periods of time relative to other brands.
After creating such a matrix, the next step would be to assign a number for each brand/parameter combination, such as “1” if the judgment on that consideration is low likelihood, poor or some other negative.” If “1” is the negative number, “3” might be high, excellent, very likely or similar. Then, “2” would be used for neutral performance or when a conclusion cannot be reached (though using that number should be kept to a minimum because it injects a degree of “benefit of a doubt” that might penalize other brands.) The last step would be to add up the numbers for each brand and arrange the brands from the highest score to the lowest.
Notice the initial cost is not factored into such a matrix. This is because an inferior product can sometimes hide behind a low initial cost. By including the initial cost in the matrix, whether that price is high or low, an otherwise high-scoring product could be penalized or a low-scoring one could be given an undeserved boost. Instead, an item’s purchase price should be evaluated in light of its ranking in the matrix.
The resulting matrix and scores can provide a procurement team a means to conduct more meaningful and insightful discussions to arrive at the best purchasing decision. While this approach might not have the precision and mathematical complexity of a true LCC analysis, its validity as a decision-making tool is much closer to evaluating the true cost of a product than initial cost alone.
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