With each private or business purchase we evaluate, whether the respective deliverable justifies the price. I find the practical approach of a colleague interesting, who determines the value of a book in a simple manner. First he weighs the book in his hand and feels the haptics. Then, he looks for the number of pages and judges the binding of the book. Finally, he checks the typeface, the illustrations and the wording of an arbitrary page of the book. His evaluation of the book results from all criteria, independently of the actual content.
The business procurement is not as simple, since the deliverables, the products and services, can not be checked in such a simple manner. Already the specification of smart quality criteria is difficult for the buying company. Long-time purchasing power has made the procurement forget their abilities to completely evaluate in a fair way. This is one reason that they simplemindedly want to pay less and less for more and more.
One approach is to evaluate objectively the people, the machines, the material, the infrastructure and the margin of the supplier. The result is a realistic price calculation acceptable for all parties, which let suppliers and companies survive and prosper on a long-term basis. Beside Specific, Measurable, Adequate, Relevant and Testable descriptions of the requirements, it is helpful to consider the following components of a deliverable.
- People
Each deliverable is supplied by a certain number of people. They must have capabilities and cooperate reliably. At the same time, they need humane working conditions and a remuneration that ensures them a living. If one aspect is not fulfilled, problems evolve that endanger the overall system of the procuring party. - Machines
are an important component of the value chain. The reliability and the quality of the results are determined by the quality of the components and their manufacturing. Good machines cost more. Also the contribution of services requires equipment – above all computers. Their reliability determines the steady contribution of the services. Failures of the machines endanger the overall system of the procuring party. - Material
Some deliverables depend on raw materials or particularly treated materials and parts. Since meanwhile there is a world-wide competition for raw materials, the suppliers do not accept any longer unfair prices. Instead the dependent manufacturers have to be grateful to receive supply. An awkward procurement policy can endanger the overall system of the procuring party. - Infrastructure
The infrastructure starts with power supply, goes to the transport routes and to the various buildings. A failure of the infrastructure can happen very quickly in crisis areas. This increased risk is not necessarily part of the economic calculation of offshoring. The consequences of earthquakes, pirates and bad building structure can endanger the overall system of the procuring party. - Margin of the vendor
All profit-oriented enterprises strive for growth. Unfortunately, growth always happens at the expense of others. In the last twenty years, companies adapted their procurement in such a way that long-term contracts give them constantly sinking prices. The supplier has only a little leeway. (s. the previous bullet points). What remains is the renunciation of parts of the margin. If the supplier waives these non-profitable businesses, it can endanger the overall system of the procuring party.
Under the motto of a competitive procurement, companies delude themselves to the fallacy that they always have sufficient suppliers, in order to be able to negotiate ever lower prices. The former officially preferred supplier that made 80% of their business for one company, reorient oneself and supply perhaps only 20%. Thus, the purchasing power of the companies evaporates slowly, but constantly. Today the suppliers gain control and determine who gets what. A reasonable comparison of the deliverables is the basis for close, trustful cooperation that let participate in the past all companies involved in the success.
Bottom line: Each deliverable, whether it is a product or a service, creates expenditure for its production. As soon as this expenditure is not rewarded, not only the lowly paid supplier suffers. This will lead sooner or later not only for the supplier, but also for the procuring company to a collapse. Only with prices that ensure the viability of all involved parties, the overall system will survive.