How to recognise that the problem is the process, not the price

When the price round comes to nothing

A pattern recurs in many purchasing departments: the first price negotiation with a supplier delivers a noticeable saving, the second still a smaller one – and the third barely anything any more. The obvious conclusion is then that the supplier has been ‘fully negotiated’. Often that is not true. What has actually been exhausted is the price for an unchanged specification. The problem then no longer lies with the supplier, but in one’s own requirements as to what is to be made and how.

The trade publication Beschaffung aktuell describes this link in a primer on value analysis: a product’s cost structure is not decided as late as the production stage, but already fixed at the design stage – long before a supplier ever submits a quote. Once a component is in production, every later change costs considerably more than a change made earlier, at the development stage, would have.

Three signals that point to the process, not the price

Not every cost problem is a process problem. But certain signals recur reliably when the real cause lies there:

• Several suppliers, independently of one another, name the same manufacturing difficulty. When different suppliers describe the same operation as particularly laborious, that is rarely down to any single supplier – but rather to a specification that makes it so laborious in the first place.
• The tolerance chosen is tighter, or the material chosen higher-grade, than the function requires. A requirement carried over from an earlier application and never questioned since drives up costs even though it is no longer needed anywhere in today’s product.
• Rework or scrap keeps turning up at the same point, regardless of which supplier is delivering. That points to a design or process step that is inherently hard to control – no negotiation result will change that.

If one of these signals appears, the relevant question shifts from ‘What does this cost?’ to ‘What exactly is this requirement for, and is it worth this effort?’

Function-based thinking instead of part-based thinking

The central difference that value analysis introduces is the change in the question being asked. Instead of asking how the cost of a single component can be reduced – part-based thinking – the method asks what function an assembly has to fulfil as a whole and how that function can be achieved with less effort or greater benefit – function-based thinking. That question cannot be answered by purchasing alone. It needs design engineering, quality assurance and – where available – the supplier itself at the table, because it knows production best.

The difference is clearest in the timing: a value analysis run on a product that is already in production finds only limited room for manoeuvre left, because many decisions are already locked in. The same question is most effective when it is asked before the design and the manufacturing process are fixed – at the point when changes still cost nothing but time at the drawing board.

Why purchasing rarely answers this question alone

One reason why price rounds still so often remain the first and only lever lies in the allocation of responsibility: purchasing negotiates with the supplier but rarely has the authority to change a technical specification once it has been released by design engineering. A price round can be decided within one’s own department; a conversation about the specification needs the agreement of another department that is not directly accountable for the outcome of the negotiation. The easier route is therefore chosen more often than the more effective one – not out of convenience, but because it requires no coordination.

How you can check this without setting up a major project

A simple test is often enough to distinguish between a price problem and a process problem in your company: for the three to five most expensive items in a purchasing category, ask whether the specification has changed since it was last substantively reviewed – and if not, when it was last actually reviewed rather than simply rolled over automatically. It often turns out that the last substantive review was years ago. In that case, your next sensible step is not another price round, but a conversation between purchasing and design engineering about what the specification still needs to deliver today.