Organisations when faced with what at first looks like insurmountable challenges on cost will often take the route of purchasing on price. A 5% or 10% reduction in cost is always welcome right?
No its not.
Organisations that persistently focus on cost reduction through purchasing are missing the advantage of partnership and of long-term cost reduction through delivering on value-for-money through the whole supply chain. Buy purchasing cheaper an organisation will so often miss the objective of long-term operating cost reduction coupled with overall improvement in quality of product and service and the benefit of lasting and trusting relationships.
Cutting business unit cost will often result in frustrated customers who inevitably will take their business to your competitors. The net result being an increase in cost across the whole organisation and loss of business which will be more costly to recover if at all possible.
The foolhardy pursuit of business unit cost reduction and the effect on the whole business is generally well understood although not necessarily effectively managed. The drivers for business unit cost reduction are not nearly so well understood so ineffective management results. The sense that risk is understood and be carefully managed becomes the way in which purchasing decisions are made, the courage to change the system not being in evidence.
Business risk avoidance is at the heart of good business leadership. By developing and maintaining productive two-way partnerships with CRITICAL supplier the business operating cost will be maintained at a level where the customer benefits as does your organisation.
The dangers of purchasing on the basis of price are that organisations do not act systemically but as a collection of inter-related parts but not acting in unison, the silo mentality becomes the norm.