I hope that you have enjoyed the article “The Wrong Cost Savings Goal.”
As purchasing departments announce their annual goals at this time of year, I often watch with concern. Often purchasing departments are measured (or measure themselves) only on one factor: cost savings (more specifically, price reduction). In the current economy, cost savings/price reduction initiatives seem to be more aggressive than they have been for some time.
While reducing prices is generally a noble achievement, ignoring supplier performance for the sake of a lower price can be destructive. Imagine jettisoning a reliable supplier for a supplier that fails to deliver on-time on 50% of orders. Or having to constantly deal with returns to a new supplier that just can’t meet quality standards. Or getting beat up daily by end users who claim that a new supplier’s service is terrible.
Many purchasing departments who get the prices necessary to substantiate their cost savings reports will appear to have met their goals while the company falls apart to some degree. There is something wrong with that picture. It’s very 1989-ish.
Requiring maintained or improved supplier performance alongside price reductions is one solution. Measuring cost savings on a total cost of ownership basis is another. This implies that the purchasing department knows how to manage supplier performance and calculate total cost of ownership (both of which are taught in our online course “14 Purchasing Best Practices“).
In closing, I’ll reiterate the advice that I shared at the end of the article: “So be sure to mention supplier performance in your cost savings goals! And if you’re not in a position to rewrite your ‘wrong’ cost savings goal, share metrics showing maintained or improved supplier performance when reporting your actual cost savings throughout the year. It will show management and internal customers that you know the importance and impact of modern purchasing.”