“I’m buying my widget from Supplier A because he’s cheaper than the preferred vendor that Purchasing told us we have to buy from.”
That’s what Dave in Maintenance said to me.
He figured that he could buy his £100 order for 10% less from a local company where his friend works.
But then, a few things happened that Dave didn’t expect.
1 – Delivery was late –> 30 minutes’ time chasing up.
2 – Stores couldn’t receive the goods in the system because the supplier doesn’t exist and there’s no PO –> another 30 minutes of head scratching.
3 – Then a vendor record had to be created because they don’t exist in the system –> 2 hours to process the paperwork and send it to a master data person for them to enter the vendor in the system.
4 – There’s something wrong on the form. The supplier’s VAT number has a digit missing. –> Another 1 hour sorting this out with the vendor.
5 – Vendor invoice is rejected because the invoice has no PO referenced. –> 1 hour in emails to-and-fro, submitting this invoice to Accounts Payable, explaining the problem and then getting them to match the original PO.
Let’s assume £25 per hour for the employee hassle and time spent doing all of this unnecessary admin work.
That’s a LOW estimate, by the way…
That’s £125 of hidden cost to manage Dave’s cheaper supplier
Multiply that by the hundreds or thousands of POs that your organisation issues each year on behalf of all the Daves in Maintenance out there who think they’re saving the company money.
The purchase price is just the tip of the iceberg.
Was Dave’s choice really the cheaper supplier?