The five stage model for procurement shows a progression from low value on the left to high value on the right:
At the far left you see the “available” stage. At this stage one is simply ensuring that a company or department has what it needs to keep production flowing and provide product to customers. Stage two is purchase price variance buying, or PPV. Part price is the primary driver at this stage.
At stage three we begin to take a total cost of ownership, or TCO, perspective. TCO encompasses all costs associated with the acquisition, use, support and disposal of a product.
Stage four is the value supplier stage: this exists when the purchasing organization uses their supply base as leverage to reduce total cost by, for example, implementing supplier partnerships, including suppliers in the design phase or setting up auto replenishment systems. All of these steps can reduce overall cost of the product, even if the part price is a bit higher.
At stage five you begin to truly manage your demand in order to allow for better buying, reducing overall cost and improving profit margins. Very few companies are at this stage. Toyota is the foremost example of a company that has reached this stage. For more on design for supply chain management, please see my post from November 2011.
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