The success of a manufacturing process is often dependent upon the quality of the chemicals that are used. Purchasing departments face the challenge of buying raw materials that meet required specifications and are priced within the stipulated budget. In many instances, it is not possible to satisfy both these requirements. Consequently, a choice has to be made between one and the other.
Adopting the low-priced, low-quality option may help in meeting financial budgets, but could lead to dissatisfied customers, product recalls or even expensive lawsuits. On the other hand, going with the expensive option may result in making a loss on the sale of the product that is being manufactured.
What are the steps that a purchasing department must take to help it make the right choice?
Keeping track in a dynamic marketplace
Chemical prices can vary considerably over time. They are also dependent upon a variety of factors that include the level of demand, transportation costs, energy prices, and production capacity in the area.
Monitoring various sources for the required grade of a chemical can be a difficult task. But it is an essential exercise given that the market is in a constant state of flux.
Lower prices, but at what cost?
At times purchasing departments may have the opportunity to buy chemicals at bargain prices from suppliers with whom they have not dealt earlier. If the entity providing the raw materials is well-established and has a sound reputation, the decision to start dealing with this new seller is probably a good one.
But a situation may arise where it is difficult to verify the supplier’s credentials. It is also possible that there may be negative reports about this party. In such circumstances, there is a chance that the chemicals that are supplied may have quality issues. You may also experience late deliveries, or non-adherence to the terms that were agreed upon.
If your manufacturing process can tolerate these deviations and you are able to sort them out over a period of time, the decision to start buying from this new supplier could prove to be correct.
But if quality or delivery issues result in missed shipments and a failure on your part to meet the commitments that you had made to your own customers, the savings on chemical purchases will be far exceeded by the direct and indirect losses that your organization suffers.
Test the waters before taking the plunge
What is the way out? How can you start buying from low-cost suppliers who do not have verifiable credentials?
One option is to place an initial low quantity order to understand the sort of problems that may come up. Very often, quality issues and other complication may arise due to a lack of communication or a misunderstanding. Starting off small will help sort these out at an early stage.
Alternately, if the supplier is not trustworthy, your test order will reveal this and the loss you suffer will be minimized.
Maintain a balance between quality and price
A McKinsey & Company study has found that a purchasing-improvement initiative can have a significant effect on a company’s financial performance. A 6% to 10% reduction in overall spending can increase earnings before interest and taxes by 3% to 5%. If an organization can lower its purchase costs while maintaining the technical specifications of the chemicals that it purchases, it will be able to boost its bottom line and gain a competitive edge in the market.
The purchase decision need not necessarily be a trade-off between price and quality. Establishing linkages with a range of suppliers for its needs can give a purchasing organization the opportunity of taking advantage of changing market conditions to meet its quality goals while simultaneously keeping its costs under control.
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