Cutting Cost, Not Price

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In any supply chain survey, the issue of cost comes up repeatedly, often as the number one issue. Even when it doesn't, there's a sense that all the other issues are important, and we’d like them fixed, as long as the price is competitive and constantly being driven down. In some cases, it's worse, and every other variable, such as risk mitigation, logistics management and quality control, becomes a given, with price becoming the only variable and influential factor when selecting a vendor.

But let's not get confused about what constitutes price and what constitutes cost. These are quite different things, and if you are just driving the price down through pressure on your vendors, you'll almost definitely suffer elsewhere. Here we’ll explore the downside of focussing on price and suggest some of the practical ways you can reduce costs without having a negative impact on your product.

What's wrong with focusing on price?

The answer to this is almost everything! I’ve seen too many companies work their way through vendor after vendor on a price reduction policy that is akin to the Spanish Inquisition, their path strewn with the bodies of nonbelievers. The truth of the matter is that suppliers are like spouses—if you’ve had more then three, it’s probably you.

The strategy of driving price down in an adversarial manner creates a relationship that is as far from a partnership as it can be. A collaborative price reduction policy may work, but only when there is mutual benefit or where both parties are putting something in to make the supply chain operate in a more efficient way. This adversarial route breeds contempt and mistrust, and may force your vendor to cut corners and compromise—certainly not something that you want when the product they are building is destined for your loyal customers. Their output reflects on your brand, and could cost much more than you save as a result of field failures.

Let’s instead focus on cost!

If instead of looking at price—and by price I mean the price per unit on the invoice you receive from the vendor—we look at cost, there is much more to get your teeth into and much more on which to collaborate with your vendor. I’m not advocating ignoring price; that’s certainly part of the cost. But when working on price, we should look at what we can do to help our vendor manufacturer and fulfil for less, not how we can reduce their margins. An insolvent supplier is never a good one.

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Editor's Note: This article originally appeared in the July 2015 issue of SMT Magazine.



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