Procurement: Lowest Price Doesn't Always Mean Lowest Cost

By Andrew Gager  
OTHER PARTS OF THIS ARTICLEPt. 1: This PagePt. 2: Partnering With Suppliers Produces Many Benefits

Several years ago, I purchased a new automobile. I did the customary negotiating and felt we settled on a reasonable selling price. Then I started the real negotiations. I wanted a better finance rate — check. I wanted the upgraded floor mats — check.

I wanted the dealership's name off the back of my car and license plate holder. Check. I then negotiated that they would invoice all parts used to service my car at cost. I was willing to pay their hourly labor rate but not the insanely marked up price for parts. Check.

My point is that everything is negotiable. Maintenance and engineering managers in the process of specifying products and technology for institutional and commercial facilities need to remember that suppliers are in business to make money. Negotiating the lowest possible price does not necessarily translate into the lowest possible cost.

These proven strategies can help lower your total acquisition costs and, more importantly over the long term, total cost of ownership.

Supplier partnerships. When I was in the private sector, I was tough on suppliers, but I considered them partners in business. I understood they were in business to make money, and I respected that. Yet our suppliers can hurt us in so many ways, including, but not limited to, delivery performance, quality, and service. My best-performing partners achieved and maintained all those elements, and they also helped my organization identify opportunities to reduce costs.

Payment terms. The longer you keep money in your pocket, the better. When I took accounting in high school, I learned the term, 2/10 net 30, which described a way of providing cash discounts on purchases. If a bill was paid within 10 days, there was a 2 percent discount. Otherwise, the total amount was due within 30 days. Customers took the discount whenever they got around to paying the invoice. It is still common practice to offer discounts for early payments, but the net-due days have grown to 45, 60, 75 and even longer. Think of furniture stores that offer no interest for 24 months.

Lease vs. buy. Sometimes we only need a piece of equipment for a certain period of time. Why not lease? How many cars today are leased? That is because leasing is cheaper than buying, and you get a new car every two to three years, along with a higher probability the newer model will have more bells and whistles. Remember, leasing and the monthly payments are negotiable.

Volume discounts. If your department buys large amounts of supplies, negotiate a discount based on volume. One major university's storeroom operation once held $1 million worth of toilet paper. Instead of stockpiling, managers can establish an annual usage and spread those deliveries over 12 months while negotiating a reduced price for achieving certain acquisition levels.

Fuel surcharges. When logistics companies started adding fuel surcharges to our invoices, they became a big burr under my saddle. In my opinion, this was the cost of doing business. I refused to pay. After a few months of not paying the surcharge, the sales rep and his boss started making phone calls and visits to my office.

Here's how I dealt with it: Diesel fuel is a commodity. The average cost over the time period in question is $3.96 per gallon, but over time, the price fluctuated above and below the average. I negotiated annual contracts with logistics carriers. We agreed to the average price and locked it for the term of the contract. Any time the price of diesel went above the baseline, I paid a fuel surcharge based on a percentage. If the price fell below the average, I wanted a rebate at a negotiated percentage.

Continue Reading: Management Insight

Procurement: Lowest Price Doesn't Always Mean Lowest Cost

Partnering With Suppliers Produces Many Benefits

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  posted on 5/8/2013   Article Use Policy

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