Doing business in a challenging economy and competitive marketplace can be a tricky proposition. Faced with shrinking profit margins, it’s understandable why many tier one manufacturers are trying to trim expenses within their supply chains. As a result, the search for a fabrication supplier is often driven first by cost concerns. But if your goals are to minimize expenses and maximize profits, it is important to understand the potential negative impact of accepting the lowest bid.
At STAUB Manufacturing Solutions, we have worked with many manufacturers who have made the mistake of accepting the lowest bid and then turned to us to help fix their issues. In this installment of our Smart Fabrication Sourcing series, we will explore the risks, consequences, and true costs of chasing the lowest-price fabrication bid.
Consider the hypothetical scenario below for an illustration of what is at stake.
A fabrication buyer requests multiple bids for 500 steel brackets per month for 12 months (6,000 units per year). Supplier quotes range from $3.50 to $4.35 per bracket ($21,000–$26,100 annual). The buyer selects the lowest price, expecting to save $5,100 per year compared to the highest bid.
But, during the 12-month contract, that low-priced supplier had significant production and quality issues that impacted the manufacturer’s project timeline. The supplier missed the monthly delivery target six times and delivered out-of-tolerance and/or unusable parts four times.
The production impact to the manufacturer from these supplier missteps was considerable:
- 35 hours of lost production time from waiting on parts
- 25 hours of product management staff working through all the issues
- 20 hours of quality assurance time inspecting product defects
When you do the math, it turns out that the actual cost of selecting a low-price supplier was even higher than the highest bid:
- Purchased cost = $21,000
- Lost time expense (80 hours at $85) = $6,800
- True cost = $27,800 (6.5% more than the highest bid)
Unfortunately, the repercussions of selecting a low-price supplier can go well beyond short-term profit losses. Production delays can damage your reputation and hurt relationships with long-time, loyal customers. At the end of the day, the opportunity costs from the hassle, frustration and potential loss of future business are incalculable.
If you’re ready to work with a team that’s committed to getting it right the first time, reach out to the fabrication experts at STAUB. We will help you protect profits and your reputation by developing a true-cost, high-quality bid.
In our next Smart Fabrication Sourcing post we’ll review the five mistakes to avoid when designing fabricated sheet metal parts.