Everyone has heard that businesses are built on relationships. However, many times suppliers are seen as commodities to squeeze small profit increases out of instead of seeing them as valuable partners that can be an asset in building your competitive advantage. This can be a costly mistake. While it is important to purchase components and materials at a favorable price, focusing solely on price can increase risk for your company.
Instead, purchasing industry training leader Omid Ghamami suggests looking at Total Cost of Ownership (TCO), an estimate of all the direct and indirect costs involved in acquiring and operating a product or system over its lifetime.
“Let’s say a supplier has a profit margin of 20%. The majority of our industry is focused on squeezing that 20% as cost savings instead of trying to compress the 80%” Ghamami says. This can be done by making sure that the product is designed for TCO. Here are some questions to ask yourself when planning to design for TCO.
- Are there unneeded features that are increasing costs? Like a company logo printed on a product being buried underground?
- Is there any technology that can be used to decrease TCO? Like software that can highlight manufacturing issues before production has begun?
- Does your supplier have any ideas to help you reach your goals?
Communicating and working closely with your suppliers is paramount. Ghamami suggests telling your supplier “It is important to make your suppliers comfortable enough to tell you if something is not smart, if I tell you to do something that isn’t smart, tell me. You miss opportunities by not talking to suppliers about ideas for improvement or the goals for the project. You have to harness supplier knowledge.”
Instead of going to your suppliers and saying, here are the specs, quote exactly what is written and don’t you dare deviate or else your bid will be disqualified, Ghamami offers this solution, “Why not ask for two responses? Exactly what we asked for and what we should have asked for.” This will foster a relationship of collaboration with your suppliers while potentially giving you total cost of ownership reductions and making you look like a hero to your organization, with little extra work on your end.
Quotes taken from a video of Omid Ghamami’s speech at the Mississauga Convention Center (https://www.youtube.com/watch?v=aLn7k0QCyxw)
Visit https://purchasingadvantage.com to learn more about Omid Ghamami’s world class purchasing training.