Supplier Relationship Management
TCO - Total Cost of Ownership - is the purchase price of an asset plus the costs of operation.
The essence of the concept is that the full costs of a decision should be evaluated, rather than focusing on the initial purchase price (of hardware and software for example). Installing a new CRM system will have a number of direct and other attributable costs:
- software costs
- hardware costs
- installation costs
- customisation and configuration costs
- training costs
- continuing licensing costs
When choosing among alternatives in a purchasing decision, you should evaluate not just an item’s short-term price, which is its purchase price, but also its long-term price, which is its total cost of ownership. The item with the lower total cost of ownership will be the better value in the long run.
Take a simple example, the total cost of ownership of a delivery truck is not just the purchase price, but also the expenses incurred through its use, such as repairs, insurance and fuel. A second-hand delivery truck that seems to be a great bargain might actually have a total cost of ownership that is higher than that of a new delivery truck, if the second-hand truck requires numerous repairs while the new truck has a three-year warranty.
The Total Cost of Ownership (TCO) concept was ‘reinvented’ in relation to the information technology world.
In calculating the total cost of ownership for a computer, the following items may be considered:
- Purchase cost and depreciation of the computer
- Software purchases
- Support personnel salaries and benefits
- Implementation costs
- Network infrastructure costs
- Server costs
TCO analysis has since been expanded to include ‘extended costs’ for any purchase – these are called fully burdened costs.
The best suppliers are low-cost, not simply low-price. Purchase price is only one component of the total cost of acquiring materials. The total cost of ownership of acquiring goods and services from a specific supplier includes the purchase price plus the coat of performing all of the procurement related activities:
Many leading companies depend on their suppliers to produce high-quality products at short notice and deliver them directly to their point of use – delivering products with no defects, requiring no inspection and ‘just-in-time’.
Thus developing, managing and sustaining good supplier relationships is critical.
Progressive companies view suppliers not just as ‘suppliers’, but as critical ‘strategic partners’ who work with their customers to provide extended services and to deliver new ideas and innovation.
Managing operations effectively and efficiently enables a company to offer their customers key vital elements of an attractive value proposition:
- Competitive prices, lower total cost of supply – lower costs to customers, thus increasing the customer’s profit
- Perfect quality – deliver zero-defect products and services to customers
- Speedy, timely purchase – deliver products and services on time
- Offer excellent selection to customers
Operating processes produce and deliver goods and services to customers, and while operational excellence alone is not the basis of a sustainable strategy, managing operations remains a priority for all organizations. Without excellent operations, companies will find it difficult to execute strategies.
Operations management focuses on carefully managing the processes to produce and distribute products and services. Major, overall activities often include product creation, development, production and distribution. Related activities include managing purchases, inventory control, quality control, storage, logistics and evaluations of processes. A great deal of focus is on efficiency and effectiveness of processes. Therefore, operations management often includes substantial measurement and analysis of internal processes. Ultimately, the nature of how operations management is carried out in an organization depends very much on the nature of the products or services in the organization and varies widely from retail, to manufacturing and wholesale. It will include some or all of the following:
- Purchasing & Supply Chain Management
- Control and Coordinating Production Function
- Product and Service Management
- Quality Management
- Inventory Management
- Logistics and Transportation Management
- Facilities Management
- Enterprise Resource Planning
Production & Operations – Managing Quality
Achieving high quality does not happen by accident. The production process must be properly managed to achieve quality standards. Quality management is concerned with controlling activities with the aim of ensuring that products and services are fit for their purpose and meet the specifications.
There are two alternative approaches to managing quality.
Quality control refers to the process of inspecting products to ensure that they meet the required quality standards
This method checks the quality of completed products for faults. Quality inspectors measure or test every product, samples from each batch, or random samples – as appropriate to the kind of product produced.
The main objective of quality control is to ensure that the business is achieving required standards.
Quality control involves setting standards about how much variation is acceptable. The aim is to ensure that a product is manufactured, or a service is provided, to meet the specifications which ensure customer needs are met.
At its simplest, quality control is achieved through inspection. For example, in a manufacturing business, trained inspectors examine samples of work-in-progress and finished goods to ensure standards are being met.
Advantages of Quality Control
- With quality control, inspection is intended to prevent faulty products reaching the customer. This approach means having specially trained inspectors, rather than every individual being responsible for his or her own work.
Disadvantages of Quality Control
- A major problem is that individuals are not necessarily encouraged to take responsibility for the quality of their own work.
- Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as the manufacturer does not want its name associated with substandard product. Some rejected product can be re-worked, but in many industries it has to be scrapped – either way rejects incur more costs.
- A quality control approach can be highly effective at preventing defective products from reaching the customer. However, if defect levels are very high, the company’s profitability will suffer unless steps are taken to tackle the root causes of the failures.
Quality assurance puts in place processes that ensure production quality meets the requirements of customers.
This is an approach that aims to achieve quality by organizing every process to get the product ‘right first time’ and prevent mistakes ever happening. This is also known as a ‘zero defect’ approach.
In quality assurance, there is more emphasis on ‘self-checking’, rather than checking by inspectors.
Advantages of Quality Assurance
- Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage
- It can help improve worker motivation as workers have more ownership and recognition for their work.
- It can help break down ‘us and them’ barriers between workers and managers as it eliminates the feeling of being checked up on.
- With all staff responsible for quality, this can help the firm gain marketing advantages arising from its consistent level of quality.
Total quality management (“TQM”) is a specific approach to quality assurance that aims to develop a quality culture throughout the firm. In TQM, organisations consist of ‘quality chains’ in which each person or team treats the receiver of their work as if they were an external customer and adopts a target of ‘right first time’ or zero defects.
Quality Control or Quality Assurance?
Which approach to managing quality is best? Here is a summary of the main considerations:
- A medium to long-term process; cannot be implemented quickly
- Focus on processes – how things are made or delivered
- Achieved by improving production processes
- Targeted at the whole organisation
- Emphasizes the customer
- Quality is built into the product
- Can be implemented at short-notice
- Focus on outputs – work-in-progress and finished goods
- Achieved by sampling & checking (inspection)
- Targeted at production activities
- Emphasizes required standards
- Defect products are inspected out
Delivery / Distribution Management
The distribution of products and services to customers requires examination of the company’s performance regarding – cost, quality and responsive time performance.
Objective here is to achieve ‘lowest-cost-to-serve’
- Cost of storage
- Cost of delivery to customers
- Per-cent of customers reached through low-cost-to-serve channels – electronic transacting
Objective here is to deliver ‘responsibly’ to the customer
- Lead time – from order to delivery
- On-time delivery percentage
Objective here is to enhance quality
- Per-cent of items delivered with no defect
- Services rendered with no defect
- Number and frequency of customer call-backs
- Number and frequency of customer complaints
Distribution is important because:
- Firstly, it affects sales – if it’s not available it cannot be sold. Today most customers won’t wait.
- Secondly, distribution affects profits and competitiveness since it can contribute up to 50% of the final selling price of some goods. This affects cost competitiveness as well as profits since margins can be squeezed by distribution costs.
- Thirdly, delivery is an integral part of delivering customer satisfaction.
Decisions about physical distribution are key strategic decisions. They are certainly not short term. Increasingly it involves strategic alliances and partnerships which are founded on trust and mutual benefits.
Controlling the flow of products and services from producer to customer requires careful consideration. It can determine success or failure in the market place.
The choice of channel includes choosing among and between distributors, agents, retailers, franchisees, direct marketing and a sales force.
Deciding between blanket coverage or selective distribution, vertical systems or multi-channel networks, strategic alliances or own sales forces, requires strategic thinking.
Decisions about levels of stock, minimum order quantities, delivery methods, delivery frequency and warehouse locations have major cash flow implications as well as customer satisfaction implications.