Is best landed cost a meaningful metric for a Purchasing organization? The answer is a resounding: maybe. After all, you could get lucky. What about total cost of ownership? What about value? What about warranty costs? What about the cost of production interruptions while you have manufacturing operators standing around waiting for parts? By focusing only on best landed cost, your organization can achieve a very short term benefit of buying something as inexpensive as possible. However, this myopic Purchasing practice can be very expensive in the long term.
You might choose to select the company that is closest to your point of use to save on logistics cost only to find out that the source you selected has a history of high reject rates, quality issues or supply chain disruption.
You might select a supplier because they came in with the lowest piece price only to find out they bought the business at a price that can’t be sustained. You would experience price increase threats, holding production hostage or insolvency. You have to be more knowledgeable about what you are buying than the company doing the selling. Anything else is lazy optimism that leaves your success to fate. You have to know the cost drivers in the product and the lowest possible cost to produce the product. Only then will you know if the supplier has a plan to be a successful link in your supply chain. Have you ever talked with the proud buyer that just negotiated a price that you know is lower than what it would cost you to make the part? In the short term, you might get bragging rights about winning a battle. However, when the supplier faces insolvency or a supply chain hostage crisis the recovery can be quite disruptive and costly.
What happens when you go with the lowest cost product out of China and have 6 weeks of inventory on hand and at sea and you find that you need an engineering change that makes the inventory obsolete? Does your product ever change? If never, you might be fine. If changes happen only sometimes, how many of these can you handle before a local source would’ve been cheaper? How often does the import paperwork get handled wrong at the border? Can you handle to supply chain delay? What if there is an issue at the supplier and their culture of “sense of urgency” doesn’t match yours. What are the travel costs for the team of people you have to send to ensure there is no supply chain disruption?
What about your Purchasing commodity strategy? If you have 4 items that you need to buy and you award the business for 3 of them to one supplier at fair and competitive prices, you are a bigger deal to that supplier than if you had awarded each one to a separate supplier. When you need the supplier’s help, you are more likely to get their attention of you are a major customer. When it comes time to award the 4th item, you will, undoubtedly, be able to find another supplier that is willing to buy the business with a lower cost. So, you award this business with less, little or no profit to the lower cost supplier. What motivation do they have for customer service? What does the first supplier (with 3 parts) think about their long term relationship with your company? If you do this to keep the first supplier honest, as a part of your long term strategy, it might be alright. However, you have to make such decisions with your eyes wide open rather than doing so for the myopic reward of a lower cost with no thought to strategy or your supply chain will be unstable. Savings through stability is a tough metric. It’s tough to track what you didn’t spend because your created stability and never had to budget for an unstable supply chain. However, the savings are real and your ability to budget and forecast with confidence improves shareholder perception.
So, best landed cost is a factor to be considered. It might actually be the benchmark that you use as a target. However, if you enter into a deal without your eyes wide open, it can lead to surprise costs (which are really no surprise at all), containment, premium freight, customer dissatisfaction and loss of business. The successful business person thinks of the long term and the total landscape of potential factors that can drive cost for their enterprise. Total cost of ownership might be a difficult metric. So are cost avoidance and savings through stability. However, successful enterprises know, and enjoy the benefit of, the lower costs associated with sound business principle planning in the big picture instead of taking the bait of the lowest quote they see.
You might choose to select the company that is closest to your point of use to save on logistics cost only to find out that the source you selected has a history of high reject rates, quality issues or supply chain disruption.
You might select a supplier because they came in with the lowest piece price only to find out they bought the business at a price that can’t be sustained. You would experience price increase threats, holding production hostage or insolvency. You have to be more knowledgeable about what you are buying than the company doing the selling. Anything else is lazy optimism that leaves your success to fate. You have to know the cost drivers in the product and the lowest possible cost to produce the product. Only then will you know if the supplier has a plan to be a successful link in your supply chain. Have you ever talked with the proud buyer that just negotiated a price that you know is lower than what it would cost you to make the part? In the short term, you might get bragging rights about winning a battle. However, when the supplier faces insolvency or a supply chain hostage crisis the recovery can be quite disruptive and costly.
What happens when you go with the lowest cost product out of China and have 6 weeks of inventory on hand and at sea and you find that you need an engineering change that makes the inventory obsolete? Does your product ever change? If never, you might be fine. If changes happen only sometimes, how many of these can you handle before a local source would’ve been cheaper? How often does the import paperwork get handled wrong at the border? Can you handle to supply chain delay? What if there is an issue at the supplier and their culture of “sense of urgency” doesn’t match yours. What are the travel costs for the team of people you have to send to ensure there is no supply chain disruption?
What about your Purchasing commodity strategy? If you have 4 items that you need to buy and you award the business for 3 of them to one supplier at fair and competitive prices, you are a bigger deal to that supplier than if you had awarded each one to a separate supplier. When you need the supplier’s help, you are more likely to get their attention of you are a major customer. When it comes time to award the 4th item, you will, undoubtedly, be able to find another supplier that is willing to buy the business with a lower cost. So, you award this business with less, little or no profit to the lower cost supplier. What motivation do they have for customer service? What does the first supplier (with 3 parts) think about their long term relationship with your company? If you do this to keep the first supplier honest, as a part of your long term strategy, it might be alright. However, you have to make such decisions with your eyes wide open rather than doing so for the myopic reward of a lower cost with no thought to strategy or your supply chain will be unstable. Savings through stability is a tough metric. It’s tough to track what you didn’t spend because your created stability and never had to budget for an unstable supply chain. However, the savings are real and your ability to budget and forecast with confidence improves shareholder perception.
So, best landed cost is a factor to be considered. It might actually be the benchmark that you use as a target. However, if you enter into a deal without your eyes wide open, it can lead to surprise costs (which are really no surprise at all), containment, premium freight, customer dissatisfaction and loss of business. The successful business person thinks of the long term and the total landscape of potential factors that can drive cost for their enterprise. Total cost of ownership might be a difficult metric. So are cost avoidance and savings through stability. However, successful enterprises know, and enjoy the benefit of, the lower costs associated with sound business principle planning in the big picture instead of taking the bait of the lowest quote they see.
RSS Feed
