Table of Contents
Analyzing Costs for Various Purchases
For decades, the issue of true cost reduction was never fully addressed in either the private or public sectors. This was not due to a lack of interest in the subject, but was instead a product of the frustration faced by many purchasing and supply professionals as they battled the built-in economic barrier to cost reduction – inflation. Inflation, which gripped the country from the end of World War II until the nineties, was accepted as a way of life. It also provided a convenient excuse for simply passing increases in cost from supplier to purchaser through the channel of distribution which, in turn, obstructed attempts at cost reduction. Inflation was so omnipresent in the economy that a single organization had no significant influence over it. The increases became so endemic and unswerving in the economy that purchasers felt like Don Quixote tilting the windmills of ever-escalating prices. Prices rose, then wages rose to compensate and then prices rose to compensate for rising wages. The wage-price spiral appeared endless, reaching frightening levels in the late seventies and early eighties.
On Being Part of the Solution
The preceding discussion is but one side of the cost reduction approach. The other side is internal and addresses actions within the purchasing and supply organization. This could entail examining internal processes, but also focuses on how, as purchasing and supply organizations, you interact with the supplier in trying to achieve cost reductions.
Plans into Action: Supplier Cost Analysis Tools
How do the concepts that have been discussed thus far play out in actual purchasing situations? This section illustrates that there are many tools available to the purchaser and the cases discussed represent possible approaches to cost reduction and control. The tools illustrated are by no means an all inclusive list, but the following cases can serve as examples of some possibilities.
Richard G. Newman, D.B.A., C.P.M.
Richard G. Newman, D.B.A., C.P.M., is a retired college professor who has taught in and written about the purchasing field for over 35 years. He currently works of counsel as a Senior Associate with Navigant Consultants, Inc. in Middleton, Wisconsin (520/399-3550). He recently authored (with Robert Simkins), The Capital Equipment Buying Handbook, published by AMACOM. He has written over 75 articles on purchasing subjects and has conducted seminars in organizations and on campuses for over three decades.
FOR FURTHER READING
- Hoover’s Inc., Hoover’s Handbook of American Business, Hoover’s Business Press, 1998
- Miller, M. S. and Graddy, T. M.,"How Purchasing Can Reduce Supply Chain Costs,"
84th Annual International Purchasing Conference Proceedings, NAPM 1999
University of Delaware graduate student project; it also links to many other sources
Listing of federal agencies with Web pages on the Internet
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