OMNIA Partners Blog

Only Focusing on Price Will Make You Broke

Posted by OMNIA Partners on July 26, 2016

procurement-pricingI used to have a roommate who thought he was a really savvy shopper. He'd come home with a 50-count bag of frozen chicken breasts because "it was such a steal." But I always thought the purchase was quite short-sided because he only focused on the volume he was getting for his buck, completely ignoring total cost of ownership. Time and time again I'd watch him throw out much of the uneaten chicken, because um, who in their right mind has the stomach for 50 frozen chicken breasts? How's your price per unit now buddy? Not to mention it wasn't fresh meat so he was consuming an inferior product. And he was ignoring the amount of energy being gobbled up by that behemoth bag in the freezer, as well as how that space could have been used for something else.

There are so many deliberations to make when buying something aside from the price on the sticker. What kind of quality are you getting? How many hoops did you have to jump through to secure the product and how else could you have been spending that extra time? These types of calculations can and should be made on any purchase in life if you want to assess the true value of what you're getting for your money. Sure gas may be 10 cents cheaper across town, but how much fuel are you burning to add the additional miles to your trip? How much are you depreciating your car or upping your probability of an accident? Could you have been engaging in an alternate activity during that time that could have produced more money than you were saving? All of these aspects should be considered "price."

When it comes to manufacturing, many companies beat their suppliers up on price. They think the initial bill is the direct link keeping their business pumping like the aorta to the heart. Of course what you're getting charged is important, but this tunnel vision completely neglects the value vendors might be supplying or underserving in all other facets of their product or service. If quality trips up production or causes inventory to be discarded altogether, there goes your savings and then some. If service can't align with you and your customer demand, then you would have made more money in the long run by paying a higher fee for better attention and care upfront. If you sacrifice a strong supplier relationship because another one swoops in with a better price, what happens when unforeseen conditions arise and your new supplier isn't capable of troubleshooting solutions when the clock is ticking like your former vendor was able to? All of this makes that lower original cost moot.

So when making any purchase, consider everything that goes into what that acquisition will cost you a week from now, a month from now, a year from now. Because it may be very different than it appeared on the surface.

Topics: Supply Chain Management, Procurement, Strategic Sourcing

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