Would you buy an investment if you couldn't determine what
it would cost you? Or if you would never know the return
you received on that investment? Most people wouldn't. But
if you can’t measure the total cost impact from your
suppliers, how do you know if your investment in that supplier
was the right one? If companies are to pursue Supply Chain
Management and Strategic Alliance initiatives, they must
learn how to document and measure “total cost”.
Total cost involves the price you pay for goods and services,
plus the impact that supplier has on both your operating
costs and your revenue streams. This impact can be positive
(value added) or negative (poor performance), and you’ll
find many of your suppliers can have as much or more impact
on your profits in these areas as they do on the price you
pay. But unless you can measure this impact, someone, at
some point, will question the decision to utilize a specific
supplier. At that point, even if your relationship with
that supplier is the most beneficial, it may be terminated.
To understand the “return” on the supplier investment
you need to:
One method for doing this is Total Cost Indexing. This
is a method that can allow your company to perform an apple
to apple comparisons between suppliers based on price, performance
and the value your suppliers add (and the dollar impact
this has on your profits). It uses the costs that each supplier
impacts, to create an evaluation of which supplier offers
the lowest total cost for doing business.
Beyond total cost there is also another area where suppliers
should be evaluated: the impact they have of your objectives.
Most companies find that as they work on total cost issues,
many of the initiatives undertaken also help companies to
achieve the objectives/goals of their organization. Understanding
what it costs you or saves you to achieve those objectives
though your supplier base can help you to make the most
cost effective decisions for you company.
