Balancing the equation

How do you balance cost savings for purchased goods against the total cost of acquiring those materials?

Mike Verespej, Editor-in-Chief -- Purchasing, 1/13/2005

Lower costs have long been the mantra of purchasing executives. That's the impetus behind strategic sourcing initiatives to create efficiencies, the impetus for outsourcing and the impetus for the continued search by U.S. companies for new lower sources of supply all across the globe.

Indeed, many people in the top jobs in purchasing today got their promotions for capturing short-term, highly visible, big public "savings" that were achieved by offshore sourcing or outsourcing of parts, commodities or finished goods.

But while these chief procurement officers are riding a big wave of adulation from their corporations, there is a growing group of purchasing professionals who question whether companies have seriously looked at the ramifications of those strategies.

And they are beginning to ask themselves what's the real cost of having a spread-out purchasing network that needs constant management attention and adds to shipping and logistics costs, delivery times and inventory costs.

Indeed, at the ProcureCon conference in Arizona last month, a hot topic was total landed costs—that is, how do you evaluate the total cost of commodities, components or goods purchased elsewhere, rather than just the per-piece price.

At long last, says one retired purchasing executive. "Many of us have had to live for years with many little and big [cost] impacts that companies can't [or don't] count" because they are not readily visible.

"I'm not trying to be a naysayer," he told Purchasing magazine, "but I think there will be papers written five years from now describing situations where it would have been better to think twice before offshoring."

His message was clear: Evaluate all your costs, not just price, so strategic sourcing doesn't end up costing your company more than what you think you are saving in short-term, easily visible straight purchasing costs.

To nominate yourself as one of Purchasing magazine's Hero of Spend Analysis stars, download the entry form at www.purchasing.com. Or send your information to either Senior Editor Susan Avery (savery@reedbusiness.com) or myself (michael.verespej@reedbusiness.com).