Every professional buyer worth their salt knows buying is not just about price. Nevertheless a great deal of bad buying takes place, sometimes dramatically counter-productively.
Delegating buying to staff – their spending of company money (your money if you are a shareholder) – is as risky as sales. Margins and reputation are at stake with both. There are four considerations for a purchase:
- quality (meets physical and performance criteria)
- deadline (speed of delivery)
- price
- terms (time to pay)
With quality there is a great deal of subjectivity involved. Maximum effort should be applied to making subjective parameters explicitly objective, while subjective decisions should be taken or sanctioned by the Board. In the absence of reference material or guidance people will be driven by price.
This can all too easily defy an overarching principle to understand not just the cost of the goods but the cost of use of the goods. Overstocking to get a price break ties up capital. Buying components that slow down workers impacts productivity. Buying goods that prematurely fail impacts warranties.
In smaller businesses, these kinds of cost-of-use troubles are typically caused by inexperience or a lack of direction. These same causes can apply in larger organisations as well but a more common factor is a ‘silo mentality’ where divisions, departments and individuals become disconnected, single-mindedly pursuing their own targets. They blame and grumble about others, then pride themselves in overcoming difficulties. Within their own silo they devise their own workarounds or acceptance of the status quo. Some examples:
Buying the least expensive nails with which to assemble fence panels might seem like a victory for a purchasing department. If those nails misfeed in machinery and halt the production line three times a day they can have a significant impact on a factory’s productivity – not to mention lowering shopfloor morale. The nails that looked ‘expensive’ to the buyer would be a bargain to the company if they kept the production line going. Production, Procurement and Accounts needed to confer to solve the problem. In this example it took a supplier’s salesman to force that meeting.
Buying the least expensive component for a mechanism in a machine caused the factory workers making the machines to modify every single component before fitting. Variance in their modification efforts led to premature failures during the warranty period. The component itself cost less than £1, an alternative was twice as much. The company held a lot of stock of the components. The waste of factory time was a multiple of either price, warranty settlement to resellers a further multiple – not to mention the impact on reputation. Design, Procurement, Production, Sales and Accounts needed to confer to solve the problem but peace in the Middle East was more likely. An effective feedback loop from Design to Production to Sales to Warranty to Design did not exist. One of the workarounds was to be obstructive to warranty claims to ‘save money’. Neither the Production Manager nor the Warranty Controller felt compelled to communicate with Design or Procurement – the Board had never directed they should do so.
A particular type of seal for glass roofs only fitted and performed properly if during erection a skilled fitter knew how to modify and adjust the mating components. The time taken to make these adjustments during construction increased with the size of the roof – on a big roof it could take more than a day. If corners were cut the roof would leak – warranty cost, potential consequential losses and reputation damage. The problem could be further aggravated by different thicknesses of glass pane. Because the company held stock of the seal, all those involved in production believed they had to use it. They had used it for years, nobody even mentioned it – status quo accepted. The cost to modify the extrusion tool to change the profile of the seal and completely eliminate the problem was £300, with no difference to the ongoing price of the seals.
Caveat emptor.
We can be horrified or amused by these stories but, in defence of the Boards of these companies, examination of the scenarios reveals they are a mixture of unintended consequences, the unfavourable side of an otherwise favourable coin and the process fragmentation that occurs as organisations become bigger.