What’s wrong with the lowest price tag?
Credit to Author: REY ELBO| Date: Mon, 17 Dec 2018 16:20:20 +0000
PLENTY. For one, there’s no guarantee that you’ll get the best product or service as many winning lowest bidders will economize on materials, labor or even short-circuit the production process if only to profit out of it. This practice runs counter to the advice of American genius W. Edwards Deming (1900-1993) who said that people and organizations must: “End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.”
This statement can be broken down into four strategic principles:
• One, end the practice of business on the basis of a price tag. Why not? That’s because the price tag covers only the initial cost. Let’s not forget we have to consider many
things like product quality, delivery promise, reliability, post-sales service, parts availability, number of service centers, and many more. Otherwise, it could be a disaster if we continue to buy lowest-priced products and services.
• Two, minimize the total cost. The price tag is not the end-all. You have to consider other invisible costs like the man-hours spent by regular customer inspection to ensure product quality and quantity, among others. Therefore, why not pass this responsibility to a reliable supplier? This saves a lot of time, money and effort, and the customer need not count the product and quality tested as these are being delivered under a “one-strike, you’re out” policy.
• Three, reliability of a single supplier. One single source is enough if it can promise the required quality product at the most reasonable cost and that it is delivered on time. In exchange, the customer must provide the highest number of volume to make that supplier profitable and sustainable. Profiting with few hundred pesos per item is enough as long as you get millions of pesos in guaranteed sales revenue. Forget about planning for emergency. Let the trusted supplier do that for you. After all, if you’re planning for Plan B, that means you’re not sure about the effectiveness and efficiency of Plan A.
• Four, agree on a long-term partnership. What can you get out of a short-term relationship with suppliers? Nothing. That’s why it’s indispensable that suppliers and customers build a partnership supported by loyalty and trust. It’s called the integrity of supplier partnering. Among other things, this means suppliers must make quality products based strictly on specifications and without the need for customer active intervention (or auditing) of the production process.
Aren’t these principles too idealistic to many of us, especially in government? Don’t make a judgment right away until you read the rest of this article.
Looking back, there’s one controversial government procurement that has apparently violated the four major points of this so-called Deming principle. In 2015, the Philippine National Police said that Columbian Autocar Corporation (CAC) won as the “single lowest calculated bidder” in the procurement of Mahindra Enforcer model as service vehicles for the police force.
In a bidding war presided by the Department of Budget and Management among five auto dealers, CAC won the bidding with the lowest price of P840,000 per unit over that of a Toyota model priced at P950,000, according to the PNP website.
After three years, issues cropped up with Senator Grace Poe calling for a senate investigation of the deal. According to a report by Rappler, “the call stemmed from the Commission on Audit’s 2017 report questioning the purchase of 1,656 Mahindra Enforcer and 398 Mahindra Scorpio vehicles in 2015. COA said the vehicles were purchased without conducting any operations needs assessment.”
Further, “the COA report validates concerns raised way back in 2014, during which it was reported that the terms of reference for the purchase were modified to eliminate other bidders, and that Mahindra was not even qualified in the first place due to their lack of service centers,” Poe said in a resolution.
The COA and Poe flagged the purchase because of the failure of the PNP to conduct “operations needs assessment” and the lack of service centers around the country where Mahindras were distributed to police units.
Can you imagine using police vehicles that were purchased despite the absence of specific needs of the user and worse, can’t be maintained properly due to lack of available parts, contributed in part by the lack of service centers? Isn’t this too basic to be ignored even without the Deming principle?
Imagine further if we relied on the lowest bidder rule when buying guns, ammunition, bullet proof vests and related weaponry for the police and the military.
That’s why, with a guarded optimism, I was elated when President Rodrigo Duterte announced in 2016 that he was not in favor of awarding government contracts to the lowest bidder, “noting how many multimillion-peso projects suffer from low quality due to corruption,” according to a report by the Philippine Star.
In conclusion, while the lowest bidder rule is a legal requirement for government procurement that is often routinely circumvented, I can also see many private corporations excessively relying on the lowest price tag. Both the public and private sectors often succumb under the mistaken belief that it’s part of good governance when in fact, it’s not.
Indeed, it’s intuitive for many of us. But if we take it from a wider perspective we can see the light, taking into consideration that the initial cost as indicated in the price tag must be rationalized with the expected total cost of the product during its lifetime. This is easy to understand if the buyer and user are one and the same.
Unfortunately, it doesn’t work that way when we’re talking of big-ticket purchases.
Rey Elbo is a business consultant specializing in human resources and total quality management as a fused expertise. Send feedback to elbonomics@gmail.com or via https://reyelbo.consulting
The post What’s wrong with the lowest price tag? appeared first on The Manila Times Online.