Purchasing and Supply Chain

Posted by Parthiv Shah on Mar 9, 2021 8:00:00 AM

Parthiv Shah

If you manufacture or supply products, purchasing and supply chain issues can make or break you.

Too Much Emphasis on Low Price

Many factors are important in purchasing - not just price.

Everyone wants to get the best deal possible. No surprises here. But sometimes searching for the best deal possible can be a mistake, if it leads to spending excessive time searching for that best deal. Though a low price is appealing on the surface, because everyone would rather pay less for something, if a company does not bother to consider why the price is so low, the company may find it is for a surprise. Generally speaking, you get what you pay for. If the company does not investigate what additional costs or risks it may be incurring with the low price, it may find it is in for a very expensive surprise - and may have to spend more money in the end to replace faulty or not-up-to-par purchases.

Emphasizing price at the expense of overall functionality and quality can be a mistake.

Too Much Emphasis on Purchase Price and Not on Terms

A purchase involves consideration of not only the purchase price but the terms associated with the purchase price.

If you are buying something, a higher price with advantageous terms may be a better deal than a low price paid all at once. Depending upon the terms, the timing of payment may make the effective price much lower than the nominal price, especially if you’re able to enjoy the time value of money benefit by deferring when you have to pay for what you buy. Further, if significant service and additional benefits are bundled with the transaction - which if sold unbundled would cost substantially more, it may be worthwhile to pay a higher price and get more, than to save a little money.

Putting too much emphasis on purchase price without considering the importance of
terms is a mistake.

Buying at Less Than Cost
Some companies have the idea that if you can buy something at less than cost, that is a great deal.

Sometimes, buying at less than cost is an excellent way to go. But what if the amount  you pay, even if it is less than cost, is still above the value of what you are acquiring? While “cost” is the sum of the expenditures the producer or purchaser incurred, it does not necessarily reflect market value, which is what someone else would actually pay. Just because you can buy something for less than cost does not necessarily mean it’s a good deal. Smart managers know that more discrimination is needed, beyond the standard of just buying at less than cost.

Buying at less than cost can be a mistake.

Relying on Low-Cost Service Contract
Selecting a low-cost service arrangement can be a tempting way to economize.

Consider the retailer that bought an expensive, complex system. Once the system was up and working, the store chose to rely upon an independent service arrangement. However, when the sole proprietor of that service enterprise became sick and unable to work, at the very time the State mandated a one-week sales tax moratorium on certain products - requiring all retailers to adjust how they accounted for and charged sales tax - the retailer was thrown into a crisis, whose solution proved to be very expensive.

Sometimes the low-cost service provider can be a short-term false economy and a long term expensive mistake.

Sacrificing for Low Cost
The primary consideration driving many business decisions is cost.

What all too many executives do not appreciate is that the quest for lowest cost can in fact involve significant other costs. How so? To achieve lowest cost, a company may move manufacturing far from the point of sale. Then, getting the products from where they are made to where they are sold may involve greater costs than if sales and production were located nearby. Furthermore, by emphasizing cost, the company may be forced to compromise other important customer priorities.

To fail to appreciate the consequences of all of the costs involved in low-cost business decisions can be a mistake.

Believing the Quoted Price Is the Price You Must Pay
Many people have the idea that the price that is quoted is the price they have to pay.

The price that is quoted is nothing more than the price that the merchant would like to receive. It may be that it is a fair price, but perhaps the price that is quoted is not the price you should pay. Every price is susceptible to negotiation. Certainly, the tendency is to accept the asking price without question. But many sellers will, if asked, negotiate a better deal than the asking price. If you don’t ask, you will never discover what price you might have gotten.

To think that the price that is asked is the price you should pay is a mistake.

Not Distinguishing between Easy-to-Buy and Easy-to-Use
In business, you need to not only buy things, but you have to use them.

Just because something was easy to buy - because of advantageous pricing, flexible terms, or accommodating customer service - does not necessarily mean it is easy to use. Sometimes, the products or services that are harder to buy but easier to use are the better alternative.

Easy-to-buy products and services do not usually take into account the customer’s need to carefully assess their current requirements, anticipate future requirements, or consider alternatives. A vendor who insists on the customer spending more time assessing explicit present needs, future requirements, and different alternatives imposes more cost and effort—but often more up-front effort results in a much better outcome.

Easy-to-buy can be a mistake.


Relying on Crony Capitalism Rather Than Market Reality
In some cultures crony capitalism - doing business deals with your cronies on a “you
scratch my back, I’ll scratch your back” basis - is the essence of the economy.

Although crony capitalism can be appealing at one level, ultimately crony capitalism is
self-dealing in a closed system. Crony capitalism can be disconnected from market
reality, as transactions are justified on the basis of personal relationships rather than
dollars and cents. Companies that rely primarily upon crony capitalism are quite
susceptible to encountering disappointments.

To rely on crony capitalism rather than market reality can be a mistake.

Ignoring Supply Chain Interdependencies
The supply chain is a basic model for thinking about what is involved in getting goods
and services to your customers.

The supply chain concept considers the different players and contributors that
collectively make up the steps in producing and delivering products and services to
customers. The supply chain starts with the raw materials, then leads to the different
companies that process those raw materials, then to the company that processes, packages, and prepares the final product and service for the customer. Companies that excel generally do so because they have outstanding supply chain management, either by happenstance or, more often, by conscious attention. Companies that have problems often have problems somewhere along the supply chain. If you want to excel in business, you need to excel in supply chain management.

To fail to pay sufficient attention to supply chain issues can be a mistake.


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Topics: Business Growth

 parthiv shah


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