It’s all about key performance indicators these days. They say, whatever you measure and monitor – improves. A lot of companies these days have mature procurement functions: prices of items are negotiated and re-negotiated, innovation is being constantly tracked, value engineering is almost a second word after profit. Is there anything more, where procurement could add value? Yes, there is – by pushing costs of supplier none-performance up the stream.
Our colleagues, who speak Lean Six Sigma language, will understand very well – Cost Of Poor Quality. But this time – not internal. External. Procurement is the department negotiating contracts and commercial conditions. A part about Cost Of Poor Quality has to be a part of it.
Analysing, what does it consist of, might not be very straightforward. However, once the numbers are calculated, you might be surprised by the size of it. Answer this question: what happens in your company, when something goes wrong with incoming goods:
- package is damaged (transportation, primary, secondary);
- quantity is not right;
- delivery is late;
- goods come with physical damage;
- colour is wrong;
- size is wrong;
- laboratory tests are non-compliant;
- products don’t meet specification requirements and you are able to spot it only during production, etc.
You will quickly realise, that a lot of people have to get involved and waste their time. Their time is company’s resource. Everything has a price. Why does company have to accept it?
Here is a clue of how a very simplified evaluation breakdown can look:Cost of Poor Quality 2016 06 17.
Try applying this at your work – if the numbers are worth the effort, try negotiating and adding these conditions into your contracts. There will be two options:
- The supplier pays the bill and Procurement department will be able to bring added value for the business.
- The supplier improves performance and the company will no longer have poor quality related costs. Which can also be tracked and reported as improvement and benefits.
Thanks for reading and good luck trying to further improve your company’s results!