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What’s Behind Each Purchase Price

It’s a lot of work and much of what defines a company’s success. Managing supply and suppliers can account for more than half than a company expenses, and can rend by itself the company profitable or unprofitable. This influences the quality that the company delivers, sets the tone for suppliers to collaborate and innovate.

Leveraging effective supply management practices to keep your business running and set it apart from others. It’s all about what to buy, how to buy and how to manage suppliers that work with you. Purchasing used to be about acquiring the necessary materials, goods and services at the lowest possible price. Then came the procurement who added some obligations to assess quality of competing suppliers, establish supplier qualifications, establish material specification, but also inspect suppliers’ processes, try to assess supplier’s cost.

The modern supply management seeks to achieve a competitive advantage by working most effectively with choice suppliers, engaging in continuous improvement of processes with suppliers, and forming strategic alliances or joint-venture activities; co-branding products. And here we have the choice to produce and to outsource to consider, but also a centralized versus a local supply management system.

The benefits of centralized control are that it consolidates the costs spent,  achieves volume discounts and high priority service and supports greater standardization of supply across field locations. But there are also disadvantages of a centralized system since this doesn’t allow field operations to exert influence on suppliers and doesn’t address field operations’ specific needs. This is why most companies prefer a blended strategy where headquarters – centralize the planning of supply deciding on selection, volume and price and  field locations control buy in actions.

Another choice is about choosing a small number of suppliers and favoring a feeding frenzy. The first implies giving up a lot of control although it may elevate volume discounts and is easier to manage and foster collaboration. The second alternative might work when you want to intensify competition and count of some high cuts in price. Not the best scenario either, since the best suppliers will stay out of this game.

Most companies are looking beyond the purchase price of the product and service that they try to buy and calculate Total cost of ownership (TCO) which brings “life-cycle perspective” into procurement and supply chain management, making this a competitive advantage when properly managed. This makes the supplier part of your success and makes collaboration a business requirement in these modern times.

Supply chain competition means that companies pit their input-to-delivered-output systems against those of their rivals and if they have  early supplier involvement  and suppliers help to devise next-generation products and services  they will have a serious competitive advantage. Which also brings in discussion the discipline of the supply risk management, companies being forced to make every effort to stay on top of the supply base to mitigate risk. But this is another story for a different article.