Hey - It's not just about price!
Continuing the series on W. Edwards Deming’s 14 points for management to follow as covered in his book, Out of the Crisis. Each of the points will be discussed in a separate article.
Point #4 – End the practice of awarding business on the basis of price tag alone.
A couple years ago, I had the opportunity to get a tour of Homestead Creamery in Wirtz, VA. While sampling some of their delicious ice cream, their chairman, Donnie Montgomery, told me a story about a college representative who was interested in buying their products. Although the representative was skeptical of a higher price, Donnie convinced him that his total cost would be lower because his rich ice cream was more filling, and less would be eaten by the students. Donnie was right, the college saved money, and the students enjoyed better ice cream.
Unfortunately, too many companies make the mistake of shopping based on price alone. Similarly, many organizations will purposely buy from multiple suppliers for the same part or service to pit them against each other on price. This might work in the short-term, but it’s the wrong long-term strategy.
Deming’s philosophy encourages companies to minimize total cost by developing a single supplier for any one item, and building long-term relationships with suppliers based on loyalty and trust. By doing so, you reduce many of the “hidden costs” of shopping based on price alone, including:
- managing a larger supply base.
- poorer quality from cheaper sources, and variation in quality from different suppliers.
- less reliable deliveries and higher inventory due to greater supply chain complexity.
- longer response times when a problem occurs.
When you view your suppliers as an extension of your own business, and you treat them like a valued partner, a win-win alliance develops. Together, this relationship will lower your total costs and improve profits for everyone. If, however, you try to take advantage of your suppliers, they will do the same to you when they have the leverage, and they might not be there when you need them most.
And let’s face it. Isn’t business more enjoyable when your suppliers become long-term trusted partners?
Next article: Point #5 – Improve constantly and forever the system of production and service.
This article was previously published in the January, 2018 edition of VB Front Magazine. Mike Leigh is the President of OpX Solutions, LLC, a performance improvement company that specializes in helping organizations pursue operational excellence through leadership development and process improvement. Contact him at [email protected].