What it Costs to Obtain a New Supplier
Harry Hough, PhD, founder of the American Purchasing Society
Editor’s note: Dr. Hough is a regular contributor to this blog. This story first appeared in the March 2003 edition of Professional Purchasing.
Supplier selection is not easy. To their detriment some companies never look for new suppliers. Other organizations change suppliers far too often. In the first case, the reasons may be fear of changing for the worst or to avoid the work of finding an acceptable replacement. In the latter case it is usually because of the former supplier’s mistake or because a competitor has low-balled the price in order to get in the door.
There is a cost involved when suppliers are changed. Ideally the cost is more than offset by a reduction in price or other types of savings. Sometimes it is necessary to change sources even though a new supplier’s cost is may be higher because the usual supplier went out of business or for other reasons. In such a case, the cost of changing to a new supplier should be compared with the cost of each supplier who is bidding for the business.
The cost of obtaining material with an existing supplier, the cost that will be incurred with a new supplier, and the cost involved in making the change should be carefully evaluated. Because of the risk of making a change from a longtime supplier, some purchasing professionals will not consider re-sourcing unless there is an estimated savings of at least 10%.
online training in purchasing, negotiation, and sales
Care must be taken by the buyer to be certain that a long time faithful supplier’s mistakes are not blown out of proportion. A record of the frequency and types of mistakes could reveal a cause that may not be the responsibility of the supplier or there may be a shared responsibility between the supplier and the buying organization. Correcting the problem is often easier than changing sources. Buyers should not be too quick to jump simply because some employee within the buyer’s organization wants to change. Discuss the reasons with the employee. Explain the history with the existing source. Ask other employees for their opinion.
An evaluation of the cost involves looking at the prices paid to the old supplier and comparing them with the prices offered by any new sources. Delivery lead times must be compared. Will the new sources be able to deliver the quantities need, when needed, and with the quality that is required? Transportation time for the goods must be compared and added to each supplier’s lead time.
Part of the cost of changing sources is the hourly wages of all involved in finding and evaluating each potential supplier. The cost of transportation of the goods must be compared and added to the total.
The amount of checking and analyzing depends on the importance of the goods involved and the expected expenditure for those goods. Major items necessary for the business require multiple bids, analysis of those bids, and negotiation to obtain the lowest cost. Counter proposals by the buyer are helpful in reducing the cost, but they extend the time required to reach agreement and add to the cost of making the change.
Before making any change, it is wise to check inventory and determine if the new supplier can provide material when needed. One or more additional orders may be necessary with the old supplier before the new supplier is able to meet schedules. Make sure the new supplier has the capacity to produce the quantity required and the facilities to produce the quality desired.
If there is enough similarity of product it is a good idea to get delivery of material from the new supplier while still using the old supplier. You can then use a percentage split of business based on performance with the best performing supplier getting the most business and the other the balance. Each year this percentage can be changed. Check the quality level of the first shipments carefully. Check invoices. Evaluate how the new supplier has met the delivery schedule and compare it with what was stated.
It is very important to check on any tooling that the old supplier has that is needed to produce the material. If it is owned by the buying company it can be moved to a new supplier if that supplier is going to be a single source. Otherwise duplicate tooling must be obtained. However, the old tooling may not even fit the new supplier’s equipment.
Tooling cost can be a major factor that determines if it is worthwhile to change sources. Tooling is needed to produce metal stampings, castings, and other items. Patterns, dies for metal parts, cutting dies for corrugated boxes, plates for printing, even software are needed to produce various items.
Don’t burn any bridges when you change to a new supplier. You may not want to return to th