Tag Archives: Cost

INDUSTRIAL EQUIPMENT and our (not so) grand obsession with PRICE

We are obsessed with price.  Whether it is for products or services, price seems to have become the single most important determinant in most purchases.  Retailers offer to match each others’ price in a rush to the bottom, with one preaching that a lower price results in a better life; but, is it true?

In the business-to-business marketplace too, price has assumed an all-important position.  Given the realities of global competition, an emphasis on price at all levels of the business cycle is not only understandable, it is essential.  However, have we followed the historic human tendency and ‘carried it too far’?  How important is price; really?

Let’s admit right up front that price is important.  It is a vital element of consideration when we compare the value of competing proposals.  However, it certainly does not stand alone.  In fact, when price becomes detached from the overall value proposition, when it becomes the overwhelmingly predominant or even singular focus, it is a dangerously incomplete and unreliable measure.  Price is an honest measurement only when balanced against other factors.  A ‘price only’ or ‘price-above-all’ approach to purchasing excuses us from learning the essentials, from actually thinking about what we are doing.  However, we use the excuse at substantial risk.

What are these other factors that we must take into account during the purchasing decision?  At a minimum they include providing answers to three basic questions:

  1. What Are we Buying?  Do we thoroughly understand what we are purchasing and how it fits into our business?  In the final analysis, we are buying goods or services that will allow us to provide recognizable value to our customer (and to the ultimate consumer if they are not the same entity) and do it in a manner that allows us to receive value from the transaction too.
  2. Who Are we Buying For?  This question has a number of sub-questions but two are particularly important: 1) do I understand how they will use what I am purchasing, and 2) do I understand what will be their challenges in its use?  For example, perhaps our purchase is custom automated machinery to be used by the production division of our organization, a pressure cooker of dates, budgets and stringent quality controls.  Will minimizing the initial capital expenditure adversely affect subsequent expenditures on maintenance, labour requirements, our ability to sustain production requirements, quality of our products or services, our ability to respond quickly to changing market requirements (in other words, lifetime costs and capabilities)?  In the end, we are all dependent on our corporate ability to do our part in providing sustained satisfaction to the ultimate consumer.
  3. Who Are we Buying From?  Continuing with our production machinery example, we will need to ask ourselves: Do they truly understand our operating environment and where their product or service fits into our ability to provide value to our customer?  Will they not only support their product but support our production personnel; or, are they responding to our price-only purchasing approach by being a price-only supplier and providing minimal support?  Are they an ethical company; do they have a transparent approach to doing business; do their employees, suppliers and customers speak highly of them?

We all know that there are substantial benefits to price competition.  Price competition drives efficiency.  Price competition drives innovation.  But does price justify our obsession with it?  A less than thoughtful response will cost us in the long run.