Podcast: Don’t Choose Suppliers Based on Price Tag, Minimize Total Cost

End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.
— Dr. W. Edwards Deming’s fourth point for management transformation.

Price shopping may be a time-honored tradition, but if unit price is your sole criterion for selecting a supplier, Dr. W. Edwards Deming has some wise words for you. Don’t do it, suggests the man who has been referred to as the father of the quality movement.

In this episode of Behind the Curtain: Adventures in Continuous Improvement, hosts Dr. Mohamed Saleh and John Dyer continue their exploration of Dr. W. Edwards Deming’s 14 points for management transformation. This time, they shine a light on Point 4, which touts selecting suppliers based on total cost versus simple price, and promotes single supplier sourcing to grow long-term relationships based on trust and loyalty.

Dyer shares an experience from his time at GE, where he worked in the major appliances division. He discusses how the division partnered with suppliers, which led to improved quality and delivery. However, the introduction of a new initiative that demanded supplier price cuts upended those gains. While the company achieved supplier unit price reductions, costs increased in other areas and frustrated employees left the company.

Saleh notes that such scenarios fly in the face of a key leadership principle—respect for people—which advocates creating a win-win scenario. That’s absent when the whole game is to squeeze the supplier, he says.

“When you go after a price, I think sometimes you shortchange yourself, and you're penny wise and pound foolish,” Saleh says.

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The podcasts hosts discuss myriad ways suppliers may make up for revenue lost to price cuts, such as using cheaper materials or materials at the low end of the specifications, or charging for a service—shipping, for example—that previously they paid for. Or exit the field.

Moreover, they talk about how the impact of price cuts is less transparent than the total cost model Deming advocates. For example, a win for the purchasing department on price per unit could harm on-time delivery or quality on the factory floor.

The two conclude by delving into practices that promote improved supplier relationships, including supplier development programs, joint scorecards that show all costs and long-term relationships.

Frequent supplier changes can be detrimental, Saleh says. On the other hand, arrangements that include shared risks and rewards, and that demonstrate a team mentality versus a transactional relationship “go a long way” in creating a win-win situation, he says.