The True Total Costs of Acquisition

OK so what is your true total cost of acquisition? greenbox

Has anyone done the analysis to work out how much might be allocated to your procurement costs to cover things like; running a MRP system; raising, printing and sending orders; finding alternative sources when your normal vendor doesn’t have the stock level you expected; paying multiple freight charges from multiple and diverse vendors of diverse material; goods inwards inspection costs including the costs of returning damaged or erroneous shipments; costs associated with storing products often shipped in unwieldy pack sizes because the vendor would not decant for you; the cost of all that cardboard packaging that then costs you again when you need to dispose of it; the costs of moving material to your production area when it is required for a build; the costs of cropping, forming, assembling or programming of a part before it can go to pcb; the cost of staff in your bought ledger department entering every single invoiced line, and the associated costs when there is an invoice/PO variance; the costs of your purchasing teams being tied up on expediting an unwieldy vendor base across an unwieldy list of materials when they should be concentrating on strategic issues; the costs to the management of production teams of handling down-time and the potential loss of revenue from dissatisfied customers as a result; the costs of disposal of all the residual inventory that may have some value for somebody, somewhere; the costs of managing obsolescence so that you only run out when you plan to and have vendors that can manage product replacement programmes; the cost of poorly engineered component selection decisions causing you to procure parts only manufactured by one company in a remote part of the world that supplies you with nothing else.

This list is not yet exhausted and it probably comes as no surprise to find that over 20 years ago a survey concluded that the price of the component may be between just one quarter and one fifth of the total cost of acquisition. In the past 20 years some companies have sought out and engaged with component distribution companies that concentrate their efforts on the total cost of ownership and not just the component cost. Whilst it is appropriate not to lose sight of component costs; indeed the place to start the programme of analysis is to carry out a detailed study of your bills of material to identify all of the areas that will naturally prevent cost reduction; low fit rates across diverse manufacturers; sole sourced items; and items that can not be packaged to maximise volume benefit.

So if you were able to find a vendor with technical skill sets to assist in removing inefficiency on the bill of material, and indeed help offer lower cost replacement parts; a vendor that could deliver components suitable for immediate delivery direct to your production line, by-passing your goods inwards inspector by guaranteeing you supply integrity and accuracy; a vendor that will deliver the product directly into their vendor managed inventory Kanban locations close to your production areas; a vendor that will take away all packaging material to be re-used on the next delivery cycle; a vendor that will send you an electronic bin replenishment confirmation to enable you to electronically process the receipt of items into your stock and at the same time enable self billing to take place; a vendor that will scan the empty bins to ensure these will be replenished in the next visit from the dedicated buffer stock held on your behalf in its premises; a vendor that will assist you in disposing of residual, redundant and obsolete stock; and a vendor that will work with you on continuous improvement programmes to drive further efficiency into the supply solution then would you be interested; and would you conclude that it may save you more than you might save from your annual component cost reduction routine. Perhaps, and if so then a solution exists and has done so for at least the last 13 years.

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