Which supplier(s) do we select?

It is important that when confirming the buying approach and moving on to conduct the final selection of, and negotiations with, suppliers that we have a full appreciation of total cost.

Generally we can think of total cost as comprising pre transaction, transaction and post transaction elements. Depending upon whether this is a consumer or commercial purchase some of the cost elements may be measured in effort or time rather than a financial cost.

Pre transaction costs

This will include

  • the costs of developing the buying specification
  • the investigation of potential sources and research of the supply market
  • and, in commercial relationships qualifying (auditing) the supplier and adding the supplier to internal systems.

Transaction components, in addition to the actual invoice price paid for the goods or services can be thought of in terms of,

  • order preparation and placement
  • delivery and transportation
  • tariffs and duties
  • billing and payment costs
  • inspection costs
  • return of faulty goods
  • follow up and corrective actions
  • cost of inventory

 Post transaction costs

This can include

  • disruption to the daily running of a business due to faulty goods
  • defective finished goods
  • maintenance of the purchased products or services
  • after sales service and spare parts
  • field failures and their repairs
  • damage to the company’s reputation and goodwill
  • the cost of disposal of the items at end of life
  • cost of inventory holding and storage
  • the cost of redundant or out of date stock

The additional costs associated with pre transactions and transactional costs in addition to the invoice price can easily reach 10-20% of the invoice price. However, post transaction costs can outweigh the original invoice price by an order of magnitude especially where the business may be disrupted for prolonged periods of time, the costs of maintenance or repair are excessive or, in recent cases involving automotive manufacturers hundreds of thousands of vehicles have to be recalled.

Talking point

  • How has this thinking influenced the budget airlines approach to pricing?
  • How does this influence your sourcing decisions?

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This article is from the free online course:

Supply Chains in Practice: How Things Get to You

The University of Warwick