Minimize Total Costby John Hunter
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.
Point 4 in Dr. W. Edwards Deming’s 14 Points for Management
This point is one of the less controversial points (at least the first 2 sentences of it). Looking at total costs instead of just the price is hard to argue with. So if a product would last twice as long it is obviously silly to buy the alternative just because you save 5% on the initial price. This isn’t a controversial idea.
Though it is something that is often done when organizations fail to take a long term view, fail to see the organization as a system, fail to see the dangers of simplistic targets (purchasing will reduce costs by 5% this year…), etc.
There are many other examples: buying cheaper software that wastes much more staff time than the savings by buying cheap software in the first place, cutting call center costs that result in frustrated customers going to competitors, etc..
Another common way of explaining this point is to discuss the problems created when organizations have created management systems that encourage decisions based on what is best for parts of the organizations. So when each department is appraised on whether they cut their costs each will seek to do so, no matter how much that increases the costs for other departments. The problems of this are fairly obvious and it isn’t that those choosing to create systems that focus on improving the parts want to accept these consequences.
Often some attempt to mitigate against the problems of parts of the system seeking to optimize their own portion of the system at the expense of other parts is made. But this is rarely done effectively. If people are appraised and given bonuses based on meeting their numbers, for their part of the system, it is very likely those choices will subordinate overall total costs to the costs they will be judged on.
While the foolishness of only paying attention to short term cost is fairly obvious the systemic drivers that lead to doing so are often not nearly so obvious. And even when those risks are seen it is often easier to hope we can avoid the risks by being careful than to change the system to address those risks.
And Dr. Deming also brings in the idea of working with suppliers as partners over the long term as one of the aspects of this point. This may seem a bit confusing to people. And for good reason, I think. The 14 points were his attempt to create a fairly easy to explain and digest view on his management ideas. But it was not a complete encapsulation of his management system.
As Dr. Deming realized the issues using the 14 points as a tool to introduce his management ideas he evolved the System of Profound Knowledge as a better way to view his management system. I don’t think he every really meant the 14 points to be seen as that overall view, but to some extent it did gain such as status (though with numerous other additions: organization as a system diagram, 7 deadly diseases, statistical tools…). And when he saw the problems created when people viewed the 14 points as something other than what he intended them to be he adjusted how he presented his ideas.
I can see how you can tie together the idea of working with suppliers over the long term and mistaking the initial price tag for the total costs over the long term but really they seem different to me. In this previous post I discussed the importance of working with suppliers as partners over the long term.
Don’t overlook the, as partners, part of the phrase. This isn’t meant for suppliers from which you buy incidental supplies or services from but for those that are critical to your business.
In Out of the Crisis, W. Edwards Deming expands on the ideas of each of the 14 points.
As this post shows (as have so many previous posts) the individual points (and concepts, ideas, practices…) of the Deming management system are deeply integrated together as one management system. The dangers of selecting items on lowest price tag is related not just to that simple act but to the reward system, psychology, viewing the organization as a system (versus as a typical organization chart does, as silos of control) and the value of working with important suppliers as long term partners.