Commodity Management vs. True Cost Management
The current concept of "commodity management" is flawed.
It's flawed because it is treating even highly engineered components like circuit boards, sheet metal fabrications and cable assemblies as commodities, where one circuit board is just like another other circuit board, and the only determining factor is price.
With custom engineered components, there are a lot of varying factors that go into what that part is going to end up costing to produce, and what the product is going to end up costing the customer (you) to use.
For starters, different suppliers of certain components are going to use different methods to manage the processes of manufacturing your parts, and getting the parts from their factory to yours.
For instance, different manufacturers of the same circuit board design might have different quality control processes.
One might institute QS9000 standards, which are more costly to implement than basic ISO9000 type procedures, and therefore might lead to a higher priced PCB.
However, with the higher standards come a higher quality product, with less internal rework, which leads to a shorter manufacturing lead time (greater efficiency), and maybe even fewer product returns.
In this case, going with a company that prices its components a little higher than the competition does, but produces a product with less after-purchase costs, will probably end up saving your company a significant amount of money.
Another true cost of purchasing that comes into play after the purchasing contract has been signed is the delivery of the components to your loading dock.
We would all like to think that all freight companies are the same, so that it would be easy to decide on price alone, but alas, they are not.
I myself have started to utilize one freight company over another for the shipping of certain dense drawing (CD-ROM) packages and customer samples.
I do this because it has yet to lose or damage a package, while the "brown" one has done so several times.
I pay more upfront money for the service of my preferred freight vendor, Fed-Ex, but as you can probably see, I do better off financially in the long run with them, because they are more reliable and allow my business to run more efficiently, without my having to go back to potential customers with further requests for CD-ROMs of prints.
How about the costs incurred from situations that occur after components have been received from your supplier, and even implemented in your facility.
Let's face it, certain situations occur, no matter the supplier, such as having to expedite additional components because of an unforeseen increase in demand, or loss in shipping (reference my point above).
How about RMAs?How quick is your current supplier, of whatever "commodity" you are managing, at turning around RMA requests?If an RMA request or expedite request is not satisfied quickly enough, your efficiency as a supplier to your customers, and your revenue, can be significantly negatively affected.
Isn't this just as important as the opening price that you are paying? Price only represents a small fraction of the true cost of ownership of any product or service.
The majority of the cost of anything bought from anyone else (contract manufacturers included) comes after the contract is signed.
Please think of that the next time you start asking for quotes on the commodity you are trying to manage, and think more in terms of managing the cost of ownership, or even better, helping to maximize your company's profit.
It's flawed because it is treating even highly engineered components like circuit boards, sheet metal fabrications and cable assemblies as commodities, where one circuit board is just like another other circuit board, and the only determining factor is price.
With custom engineered components, there are a lot of varying factors that go into what that part is going to end up costing to produce, and what the product is going to end up costing the customer (you) to use.
For starters, different suppliers of certain components are going to use different methods to manage the processes of manufacturing your parts, and getting the parts from their factory to yours.
For instance, different manufacturers of the same circuit board design might have different quality control processes.
One might institute QS9000 standards, which are more costly to implement than basic ISO9000 type procedures, and therefore might lead to a higher priced PCB.
However, with the higher standards come a higher quality product, with less internal rework, which leads to a shorter manufacturing lead time (greater efficiency), and maybe even fewer product returns.
In this case, going with a company that prices its components a little higher than the competition does, but produces a product with less after-purchase costs, will probably end up saving your company a significant amount of money.
Another true cost of purchasing that comes into play after the purchasing contract has been signed is the delivery of the components to your loading dock.
We would all like to think that all freight companies are the same, so that it would be easy to decide on price alone, but alas, they are not.
I myself have started to utilize one freight company over another for the shipping of certain dense drawing (CD-ROM) packages and customer samples.
I do this because it has yet to lose or damage a package, while the "brown" one has done so several times.
I pay more upfront money for the service of my preferred freight vendor, Fed-Ex, but as you can probably see, I do better off financially in the long run with them, because they are more reliable and allow my business to run more efficiently, without my having to go back to potential customers with further requests for CD-ROMs of prints.
How about the costs incurred from situations that occur after components have been received from your supplier, and even implemented in your facility.
Let's face it, certain situations occur, no matter the supplier, such as having to expedite additional components because of an unforeseen increase in demand, or loss in shipping (reference my point above).
How about RMAs?How quick is your current supplier, of whatever "commodity" you are managing, at turning around RMA requests?If an RMA request or expedite request is not satisfied quickly enough, your efficiency as a supplier to your customers, and your revenue, can be significantly negatively affected.
Isn't this just as important as the opening price that you are paying? Price only represents a small fraction of the true cost of ownership of any product or service.
The majority of the cost of anything bought from anyone else (contract manufacturers included) comes after the contract is signed.
Please think of that the next time you start asking for quotes on the commodity you are trying to manage, and think more in terms of managing the cost of ownership, or even better, helping to maximize your company's profit.
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