SEPTEMBER 2010 NEWSLETTER – The 7 Pitfalls of Benchmark Pricing

By April 26, 2017Article

By Jim Anderson

Value – “the full and reliable satisfaction of customer requirements at the lowest total cost of acquisition, ownership and use” – as defined by Lou De Rose of De Rose & Associates, Inc.

A very common industry practice is to get three bids (the magic number) from approved sources and place the business with the lowest bidder. Another common practice, when considering new suppliers, is to ask for a “benchmark quote”, or the potential supplier may even suggest it. There are pitfalls with either of these examples. Both only take into account unit price which is only one factor in the total value you receive from a supplier.

Here are the 7 Pitfalls of Benchmark Pricing

1.  Focus just on unit price as the source of selection. (Unit price is only one cost of acquisition, ownership and use of the product or service you seek.)

2. Not investigating on-time-delivery. (Does the supplier you’re considering maintain records on OTD?)

3. Not investigating quality records and systems. (Does the supplier you’re considering maintain quality metrics? Will they share them with you? Do they have a certified quality system? How many people are in their QA organization? Do you have a system to determine what an episode of non-conformance costs?)

4. Not investigating their financial track record. (How stable are they? Have you pulled a D&B on them? How long have they been in business? How long has their management been in place?)

5. Not investigating their MRP system. (Do they have a robust MRP system in place? How long has it been in place? Is it used on a daily basis?)

6. Not investigating how they protect your documentation and revision level integrity. (Do they have a robust document control system? Will their system allow them to make un-documented changes? Will their system allow them to substitute parts or materials without approval? Do they have a systematic approach to Non-Disclosure Agreements? If ITAR regulations are involved, are they ITAR registered with the US State Department?)

7. Not investigating the handling of Non-Cancelable Non-Returnable and Minimum material buys at the very beginning of the relationship. (NCNR’s and Minimums are a fact of life when you outsource most assemblies or sub-assemblies. Does this supplier address them right from the start? Do they have a reasonable system for handling them?)

My suggestion is to set up a “scorecard” for these 7 “pitfalls” and create numerical assignments to each one. Start with the unit price. Then devise certain adders for the failure to perform in the other areas. You probably have this data or knowledge about your current suppliers.  Based on the response you have from the potential supplier under consideration, assign values to the same areas. Now you have a comparison that takes into account “the total cost of acquisition, ownership and use” – value. We’ve done one for you. See the offer below.

Cost savings is a major concern in any business. To assist you in evaluating cost and value, we have created SAVE©.

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