| In managing supply, buyers need to measure a | | | | making purchases are the costs of using the item, |
| supplier's performance if they are going to get | | | | any costs of maintaining it and the cost of disposing |
| improvements. After all, what gets measured gets | | | | of the item at the end of its useful life. |
| done! A common set of performance measures used | | | | For these items, the total cost of ownership (in other |
| by Purchasing Executives involves measuring the | | | | words the sum of the purchase cost, running costs, |
| price you have paid for a product or service, the | | | | maintenance costs and disposal costs) is a more |
| quality of that item and whether or not it was | | | | sensible performance measure than unit price. |
| delivered on time. But this is looking backwards at | | | | 2. The second is quality. The problem with most |
| what has happened. What you really need is a | | | | performance measures involving quality is that they |
| proactive set of measures that look forwards and | | | | measure the quality of what you receive, typically in |
| this article describes what these are. | | | | terms of number of rejects for a given number of |
| The problem with measuring price, quality and | | | | received items. This doesn't help you if you have run |
| delivery is that it is reactive. There is a time lag | | | | out of that item. Often you need to keep inventory |
| between receiving the product or service and getting | | | | to compensate and this costs you money. |
| the results of these performance measures. It is too | | | | What you need instead is a quality assurance |
| late then to do anything about poor performance. | | | | measure. In other words, identify with your supplier |
| If the product or service is mission critical in that poor | | | | the key processes and inputs that are responsible for |
| performance by your supplier will cause a major | | | | the ultimate quality of what you are buying and |
| disruption to your organisation's business then you | | | | measure these. If your supplier's processes are |
| cannot afford for anything to go wrong. You need | | | | capable of delivering quality and are working well, the |
| performance measures that allow you to take action | | | | probability of receiving defects is greatly reduced. |
| before poor performance is received. | | | | 3. The third suggestion is delivery. Measuring delivery |
| So here are three suggestions for turning reactive | | | | leadtime doesn't help to reduce costs. All it can do is |
| performance measures into proactive ones. | | | | aid planning and the longer the leadtime, the greater |
| 1. The first is price. Although you should never ignore | | | | the uncertainty and so the higher the cost (through, |
| the unit purchase price of the thing you are buying, | | | | for example, having to hold inventory). However, |
| just focusing on this aspect can lead to the wrong | | | | taking a similar view to the quality measure, what |
| decision. For example, if you are buying batteries | | | | you need to do is measure your supplier's operation |
| then there are other costs for you over and above | | | | cycle time. If you know what this is, you can work |
| the purchase price. The lifespan of the battery is | | | | with your supplier on initiatives for reducing it. |
| important. A battery may be 10% cheaper than the | | | | By moving from price, quality and delivery measures |
| alternative but if it only lasts half as long, you will | | | | to measures of total cost of ownership, quality |
| finish up buying more of the cheaper battery for a | | | | assurance and cycle times you put yourself in the |
| given usage than the more expensive alternative. | | | | position of being able to assure supplier performance |
| Other costs that need to be considered when | | | | instead of having to react to it. |