Sometimes Cheap Is Expensive

Audience failed to get the business for the audio component of the iPhone 5.  They had supplied its predecessors.    In 2010 sales to Apple were 83% of their total.  In 2013, they were less than 1% of total sales.

“With Apple, the business is won and lost in huge chunks,” Audience CEO Peter Santos said in an interview earlier this year.  The Moultrie Observer

A difficult business to manage would be an understatement.

There was a time when manufacturers created deep relationships with key suppliers.  That appears to be no longer true.  I noticed also that Samsung will not be producing the processor chips for iPhone 6.  The business will be going to Taiwan Semiconductor Manufacturing.

In both of these cases Apple may have sound strategic reasons for the change.  Not everyone who shops for price does.  Price alone is a poor reason to buy anything.  Deep and long relationships have subtle value.

W. Edwards Deming, the American quality consultant, in his 1982 book “Out of the Crisis” listed 14 points for the transformation of management.

One of them is “End the practice of awarding business on the basis of price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.” 

Learn to identify and understand total cost.  That is the element that matters.  Price is just a little piece of it.

For many of us, the time scale is too short.  Decisions connect to only the immediately obvious.  Short term performance, like price, is easy to measure and therefore too commonly reported.  Long term matters more because it reduces training and adjustment costs.  Those are easy to ignore.

Years I ago I had a client who supplied welding gases.  They had a huge customer that they lost over a competitive bid that saved the customer about $0.20 per cylinder.  At the time less than 1%.  Did the customer do well at this?  Not so much.  It took them almost three months to find and return all the cylinders that they had been using.  Also they had to come good for the ones they could not find.  By the time it was finished they could not earn out with interest at prime in less than 10 years.  If the cost to adjust was not included, the purchasing department likely looked pretty good, but managers measure success by including the costs for the entire enterprise.

Changing suppliers sometimes makes sense.  But in terms of risk, it can violate an important condition.  “A decision that is reversible is not inherently risky.”  Sometimes “When business is won or lost in huge chunks.” the previous supplier will have gone out of business before you have learned of the unforeseen problems with the new one.

Then what?

Long mutually supportive relationships tend to be the least expensive.

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Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

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