Is It All About Price, II<\/h1><\/div><\/div><\/div>How To Incorporate The Cost of Poor Performance<\/h2><\/div><\/div><\/div>In the last resource, I said that well-trained purchasers base supplier choices on not just price, but performance also. I promised that I would teach you how to consider the cost of poor performance in supplier selections.<\/p>\n
This approach works best when you have done business with two or more competing suppliers and you wish to consolidate your supply base. Here’s a 6-step process…<\/p>\n
\n- Define “events” that constitute poor service, poor delivery, and poor quality. For example, a poor quality event may be receiving an incorrect invoice.<\/li>\n
- For each event, determine its average cost to your organization. For example, an incorrect invoice may require your accounts payable and purchasing staff to dedicate 3 man-hours at a rate of $30 per hour to resolve the problem. Thus, the average cost is $90. Apply the same average event cost to all suppliers.<\/li>\n
- For each event, determine the percentage rate of occurrence using historical information. For example, if 10 of the last 1,000 invoices that a supplier provided were inaccurate, the percentage rate of occurrence for that supplier is 1%. Express the rate of occurrence in a decimal format (e.g., 0.01). Each supplier will have a different rate.<\/li>\n
- For each event, determine the number of opportunities for the event to occur. If suppliers will invoice you weekly over a two-year deal, there will be 104 opportunities for an event. The number of opportunities will be the same for each supplier.
\nTo estimate the cost of poor performance for each event, multiply these three things together: the number of opportunities, the rate of occurrence, and the average cost per occurrence. Cost of poor performance per event will differ by supplier.<\/li>\n - For each supplier, add the cost of poor performance per event for all events to the corresponding supplier’s price. The supplier with the lowest total cost after factoring in the cost of poor performance will generally be the ideal choice, considering price and performance.<\/li>\n<\/ul>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/spsm_verify.jpg\" "\\"spsm_verify\\"")
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services.jpg\" "\\"services\\"")
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
How To Incorporate The Cost of Poor Performance<\/h2><\/div><\/div><\/div>In the last resource, I said that well-trained purchasers base supplier choices on not just price, but performance also. I promised that I would teach you how to consider the cost of poor performance in supplier selections.<\/p>\n
This approach works best when you have done business with two or more competing suppliers and you wish to consolidate your supply base. Here’s a 6-step process…<\/p>\n
\n- Define “events” that constitute poor service, poor delivery, and poor quality. For example, a poor quality event may be receiving an incorrect invoice.<\/li>\n
- For each event, determine its average cost to your organization. For example, an incorrect invoice may require your accounts payable and purchasing staff to dedicate 3 man-hours at a rate of $30 per hour to resolve the problem. Thus, the average cost is $90. Apply the same average event cost to all suppliers.<\/li>\n
- For each event, determine the percentage rate of occurrence using historical information. For example, if 10 of the last 1,000 invoices that a supplier provided were inaccurate, the percentage rate of occurrence for that supplier is 1%. Express the rate of occurrence in a decimal format (e.g., 0.01). Each supplier will have a different rate.<\/li>\n
- For each event, determine the number of opportunities for the event to occur. If suppliers will invoice you weekly over a two-year deal, there will be 104 opportunities for an event. The number of opportunities will be the same for each supplier.
\nTo estimate the cost of poor performance for each event, multiply these three things together: the number of opportunities, the rate of occurrence, and the average cost per occurrence. Cost of poor performance per event will differ by supplier.<\/li>\n - For each supplier, add the cost of poor performance per event for all events to the corresponding supplier’s price. The supplier with the lowest total cost after factoring in the cost of poor performance will generally be the ideal choice, considering price and performance.<\/li>\n<\/ul>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div><\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div><\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
In the last resource, I said that well-trained purchasers base supplier choices on not just price, but performance also. I promised that I would teach you how to consider the cost of poor performance in supplier selections.<\/p>\n
This approach works best when you have done business with two or more competing suppliers and you wish to consolidate your supply base. Here’s a 6-step process…<\/p>\n
- \n
- Define “events” that constitute poor service, poor delivery, and poor quality. For example, a poor quality event may be receiving an incorrect invoice.<\/li>\n
- For each event, determine its average cost to your organization. For example, an incorrect invoice may require your accounts payable and purchasing staff to dedicate 3 man-hours at a rate of $30 per hour to resolve the problem. Thus, the average cost is $90. Apply the same average event cost to all suppliers.<\/li>\n
- For each event, determine the percentage rate of occurrence using historical information. For example, if 10 of the last 1,000 invoices that a supplier provided were inaccurate, the percentage rate of occurrence for that supplier is 1%. Express the rate of occurrence in a decimal format (e.g., 0.01). Each supplier will have a different rate.<\/li>\n
- For each event, determine the number of opportunities for the event to occur. If suppliers will invoice you weekly over a two-year deal, there will be 104 opportunities for an event. The number of opportunities will be the same for each supplier.
\nTo estimate the cost of poor performance for each event, multiply these three things together: the number of opportunities, the rate of occurrence, and the average cost per occurrence. Cost of poor performance per event will differ by supplier.<\/li>\n - For each supplier, add the cost of poor performance per event for all events to the corresponding supplier’s price. The supplier with the lowest total cost after factoring in the cost of poor performance will generally be the ideal choice, considering price and performance.<\/li>\n<\/ul>\n<\/div><\/div><\/div><\/div><\/div>
Do You Want a More Rewarding Procurement Career?<\/h5><\/div>
<\/span><\/div>Are you tired of not getting enough opportunities, respect, and money out of your procurement career? Well, guess what? Nothing will change unless you take action towards becoming a world-class procurement professional.<\/p>\n
Earning your SPSM Certification is the action to take if you want to bring the most modern procurement practices into your organization and achieve your career potential. Download the SPSM Certification Guide today to learn how to get started on your journey to a more rewarding procurement career!<\/p>\n<\/div>
Download<\/span><\/a><\/div><\/div><\/div>Need Better Performance From Your Procurement Team?<\/h5><\/div>
<\/span><\/div>Are you a procurement leader whose team isn\u2019t achieving the results you know are possible? Maybe it\u2019s not enough cost savings. Or frustrating performance from the supply base. Or dissatisfied internal customers.<\/p>\n
You need a performance improvement plan that\u2019s easy to implement and quick to produce results. The NLPA can help.<\/p>\n
Download our whitepaper \u201cThe Procurement Leader\u2019s Guide To A More Successful Team.\u201d You\u2019ll learn the 7 steps for transforming your staff into a results-producing, world-class procurement team.<\/p>\n<\/div>
![](\"https:\/\/www.certitrek.com\/nlpa\/wp-content\/uploads\/sites\/5\/2020\/12\/services-contracting.jpg\" "\\"services-contracting\\"")
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