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CHAPTER 4
PROCUREMENT AS A SUPPORT AND STRATEGIC FUNCTION WITHIN COMPANIES
• Higher reliance on suppliers to support directly the team’s goals, supplier is
a resource.
• Fewer problems co-ordinating work activity between the team and key
supplier.
• Greater effort on team assignment.
• Greater supplier contribution across many performance areas.
• Providing cost-reduction ideas.
• Providing quality improvement ideas.
• Supporting actions to improve material delivery.
• Offering process technology suggestions.
• Supporting material-ordering cycle-time reductions.
Not all suppliers will be suitable for involvement at an early stage. Procurement
needs to evaluate candidate suppliers’ suitability in terms of their design and
engineering capabilities, their technology and alignment with the buying firm’s
future needs and the extent of supplier investment in research and development.
Other areas of evaluation will include whether the supplier has experience with
early involvement in taking on design responsibilities; whether the supplier is
currently supporting the design efforts of other companies, including competitors;
whether the supplier is willing to commit resources specific to development
needs; and whether the supplier will safeguard proprietary information.
4.5.6 TOTAL COST OF OWNERSHIP
Total cost includes the expected and unexpected elements that increase the unit
cost of an item, service, or piece of equipment. Total cost systems, and there
are a variety of them, attempt to capture these cost elements. The logic behind
the development of total cost systems is clear. Stated simply, unit cost or price
never equals total cost. If we believe this proposition (and we should), then our
concern becomes one of trying to understand the size of the gap between a
unit price and its corresponding total cost. We also want to know in some detail
what makes up that gap.
It should be obvious why almost every purchasing measurement system
includes price-related measures rather than total-cost measures. Price is by far
the easiest of any metric to identify across a supply chain. Without a total cost
system, however, it is difficult to make sourcing decisions that do not contain a fair
amount of subjectivity. It becomes almost next to impossible to select a higher-
price sourcing option (but a lower total-cost option) without a total-cost system
supporting that decision. Having a ‘gut feeling’ that a higher-price supplier will
actually be the lower total-cost supplier doesn’t cut it. The ‘gut feeling’ becomes
much more certain with total-cost data.
The reasons for measuring total cost are compelling. If anyone can logically
argue against the following reasons for measuring total cost, we would like to
hear their arguments. Total cost models help companies: