Eskom Procurement Book 2015

PROCUREMENT AS A SUPPORT AND STRATEGIC FUNCTION WITHIN COMPANIES

• Higher reliance on suppliers to support directly the team’s goals, supplier is a resource. • Fewer problems co-ordinating work activity between the team and key supplier. • Greater effort on team assignment. • Greater supplier contribution across many performance areas. • Providing cost-reduction ideas. • Providing quality improvement ideas. • Supporting actions to improve material delivery. • Offering process technology suggestions. • Supporting material-ordering cycle-time reductions. Not all suppliers will be suitable for involvement at an early stage. Procurement needs to evaluate candidate suppliers’ suitability in terms of their design and engineering capabilities, their technology and alignment with the buying firm’s future needs and the extent of supplier investment in research and development. Other areas of evaluation will include whether the supplier has experience with early involvement in taking on design responsibilities; whether the supplier is currently supporting the design efforts of other companies, including competitors; whether the supplier is willing to commit resources specific to development needs; and whether the supplier will safeguard proprietary information. Total cost includes the expected and unexpected elements that increase the unit cost of an item, service, or piece of equipment. Total cost systems, and there are a variety of them, attempt to capture these cost elements. The logic behind the development of total cost systems is clear. Stated simply, unit cost or price never equals total cost. If we believe this proposition (and we should), then our concern becomes one of trying to understand the size of the gap between a unit price and its corresponding total cost. We also want to know in some detail what makes up that gap. It should be obvious why almost every purchasing measurement system includes price-related measures rather than total-cost measures. Price is by far the easiest of any metric to identify across a supply chain. Without a total cost system, however, it is difficult to make sourcing decisions that do not contain a fair amount of subjectivity. It becomes almost next to impossible to select a higher- price sourcing option (but a lower total-cost option) without a total-cost system supporting that decision. Having a ‘gut feeling’ that a higher-price supplier will actually be the lower total-cost supplier doesn’t cut it. The ‘gut feeling’ becomes much more certain with total-cost data. The reasons for measuring total cost are compelling. If anyone can logically argue against the following reasons for measuring total cost, we would like to hear their arguments. Total cost models help companies:

4.5.6 TOTAL COST OF OWNERSHIP

78 CHAPTER 4