Lowest price or lowest total cost: What’s your company’s moneymaking strategy?

If all your company cares about is the lowest price, it may not be worth your time to read any further. But I would also suggest that you’re missing an important opportunity!

I talk frequently about the value of partnering, but all too often find my words falling on deaf ears. The challenge is in convincing non-believers to regard their supplier relationships as strategic opportunities that can truly boost bottom lines.

You may be thinking, “If the benefits of partnering are so compelling, then why isn’t everyone doing it? Good question! I believe it’s because some companies fail to focus on the important—and lucrative—benefits associated with reducing TOTAL COST, opting instead for the illusory—and limited—benefits of LOWER PRICES. And getting companies to consider working collectively with their supplier to reduce total cost oftentimes requires a leap of faith, one that abandons old concepts and policies.

So, what are the tangible benefits your company can achieve by focusing on lowest total cost rather than lowest price? Your answers to the following questions may reveal that you are focusing mainly on price, and are overlooking a host of hidden costs incurred each and every day when using lowest-price suppliers:

1. Are you getting 100% on-time delivery and better than 99.5% good parts from your suppliers? If not, do you know what it’s costing you?

2. Can you skip incoming inspection with confidence? If not, do you know what it’s costing you? And if you’re finding defects that require MRB to disposition, do you know what it’s costing you?

3. Are you able to minimize your inventory by reliably bringing in parts just in time? If not, do you know what it’s costing you?

4. Have your suppliers’ prices been stable for years—or even dropped? If not, do you know what it’s costing you?

5. Are your customers experiencing problems with the products you deliver caused by purchased parts that do not meet specs? If so, do you know what it’s costing you?

6. Has your product’s reliability, performance and cost improved because you involve your suppliers in the design process early on? If not, do you know what it’s costing you in re-designs and manufacturing delays?

My point? A part’s price is just one component of total cost. And, it’s actually a very small component when you add the costs of incoming inspections, inventory, Material Review Boards, customer rejects, redesigns, etc., that can result from lower-quality parts. In fact, research reveals that a lower-quality part’s price represents just 15-30% of its total cost, which is why I passionately believe that only by developing supportive relationships with their suppliers can companies find ways together to reduce total costs and positively impact bottom lines.

For those who have yet to take this leap, RS Precision was there once as well. When we entered into our first true partnering relationship, we did not fully understand all the benefits or the mechanisms through which those benefits would be derived. Now 17 years later, our partnership with an aerospace OEM has blossomed into our highest dollar volume customer. To their credit, this customer routinely encourages innovation, technical development, and continuous process improvement from their suppliers. And it takes that kind of commitment and follow-through for partnering to work.

And when it does, the results are amazing. Together, we have co-developed new parts for new designs that have resulted in decreases in part cost of 30-50% for our customer, while maintaining profitability for us. And we continue to work together to drive down manufacturing costs.

Still not convinced that lowest total cost is more profitable than lowest price? Then, read these findings from the world renowned manufacturing consultant, The Juran Institute.

So, if your company is still focusing mainly on lowest price rather than lowest total cost, you may be leaving money on the table – a lot of money!

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