Rethinking the way industrial products are purchased
Greater operational efficiency is required in manufacturing today and it requires a comprehensive look at everything, starting with how things are purchased. See four clarifications on consolidated industrial purchasing advantages.
- Companies should strive to put the highest-value components into their factories and plants, with a premium on reliability.
- Industrial purchase decisions often suffer as a consequence of individual and group decision heuristics, like risk aversion.
- Compared to an older “consolidated” strategy, a more modern “specialized” purchasing strategy may offer large advantages.
Improving American manufacturing’s competitiveness on a global scale requires greater operational efficiency. Efficiency, doing more with less, is at the backbone of almost every company’s strategic planning. However, there is a huge untapped efficiency lever that companies fail to recognize, largely due to widely-accepted practices across industry for specifying and selecting industrial products.
For starters, loss aversion and risk aversion are much stronger forces in the industrial space than in the consumer products space. The consequences of this reality are less-than-optimal decisions where “not losing” is vastly more influential than actually “winning.” For example, there used to be a common phrase used in business and IT: “Nobody gets fired for buying IBM.” But as it turns out, the market found better options.
While IBM was once a powerhouse in seemingly every computing category, the consumer market – unburdened by bureaucracy and people guarding against the job security risks of a bad purchase decision – found other brands had surpassed IBM’s value. That meant customers in consumer markets could get more for their dollar buying from other brands, a practice which was eventually adopted by industrial businesses.
Consumer buying efficiency should be available to manufacturers
For the industrial products deployed in factories and plants, companies put that part of the operation in the hands of someone else to design, manufacture, service and support. It’s a critically important decision and very material to the performance of the operation. However, we often limit ourselves to guesswork regarding product reliability and performance without a second thought go back to the same brands, same products and the same store to source the items, even items across multiple product categories. Why do companies accept this “not losing” approach?
Think of the enormous efficiency strides we’ve made buying consumer products over the past 10-20 years. Imagine buying a new television. You might visit your favorite store, or log onto an online retailer’s website and look at a few reviews. After comparing prices, and you’ll likely buy the product that represents the best value for you. Buying anything of importance in the consumer products space today is a similar process, whether it be a television, refrigerator, vacuum cleaner, or a car. Imagine how ridiculous it would be to buy a car, television, refrigerator or vacuum cleaner from the same store, or the same brand, for that matter. Would that represent efficiency?
It’s hard for many of us to even remember (or imagine for younger readers) a world where product and price transparency, access to a wide variety of choices and even overnight deliveries weren’t the norm.
However, processes used today to specify and select industrial products are much more akin to buying a car or TV 20-30 years ago. If we recognize improvements and efficiencies buying products differently in our personal lives, why haven’t they manifested in the industrial products space? Don’t the quality, reliability and performance of the products we use in our factories and plants have a large impact on the reliability and performance of the operation itself? Doesn’t selecting a lesser product or paying more impact the bottom line?
Finding an industrial competitive advantage
Companies searching for improved competitive advantage should begin implementing the philosophies behind the efficiencies we’ve realized in the consumer products space and stop accepting these limitations. That means an incessant and unwavering drive to put the highest value components into factories or plants. The name on the product doesn’t matter, nor does the store you buy it from, unless the product is durable enough to withstand the pressures of your operation, has the features and capabilities you require, comes with strong service support when you need it and never fails. That last part turns out to be critical in manufacturing as the cost of even an hour of downtime is often far greater than the cost of the product that caused it. Incidentally, that’s probably why industrial products have a look and feel less like a Ferrari and more like a Humvee.
Industrial electronic products serve as an excellent example of the old, outdated, contrary buying behavior. Several major companies dominate the space, and customers buy a large shopping basket of products from their favorite brand, including automation equipment, motors and drives, and power distribution equipment. The “consolidated” buying strategy has been accepted and even promoted as superior to a more “specialized” strategy, where the best products are selected regardless of the brand (not to be confused with “customized”). “Consolidated” strategy proponents claim advantages like fewer vendors to manage, superior interoperability of components, and discounts based on volume of equipment purchased. However, as evidenced by “Nobody gets fired for buying IBM,” the industrial market has been slower than the consumer space to realize that the world around us has changed.
Four clarifications on consolidated industrial purchasing advantages
Here are some popular claims, misperceptions, and outdated notions about “consolidated” purchasing advantages:
Claim: Fewer vendors to manage
Reality: Today’s enterprise resource planning (ERP) systems have made managing multiple vendors much simpler and easier, including purchase transactions. The advantages of improved purchasing efficiency often pale in comparison to those offered by 1) putting the highest value products to work in your operations, 2) creating competition between suppliers to provide you with superior products and service for a lower price.
Claim: All products from various manufacturers are of similar quality and performance in the industrial space.
Reality: For some product categories, this might be true. However, for others there still can be large differences between manufacturers in terms of product quality, reliability, support, and overall value. User reviews and testimonials, supplier quality audits and reliability/availability data can provide insights into manufacturer and product performance. Even fractional differences in product reliability can be very relevant in industry, as downtime is often the single biggest driver of total cost of ownership (TCO).
Claim: Superior interoperability of components.
Reality: Today’s industrial electronics are designed to industry standards and to be interoperable with other components through common communication protocols. With the possible exception of very large and complex applications, the selection, optimization, and integration of electronic components today is generally simple and easy.
Claim: Discounts and cost savings based on volume of equipment purchased.
Reality: Much like in a big sale in a major retailer’s jewelry department, a superficial “discount” might still result in a much higher price than that paid elsewhere for a similar product. Normally, companies that are your single source know it, and while they might even create a concierge-type experience for you, rest assured that you’re likely paying for it.
Other signals of monopolistic behavior include pricey software upgrades and service contracts. It’s a somewhat new phenomenon, but notice how many industrial product companies these days are pushing service contracts for their products, including preventative maintenance, digital services, and software contracts? These contracts promise improved uptime and reliability, but often are Band-Aid improvements, at least compared to selecting superior products in the first place.
Digital services like IoT normally require data transfers that most companies don’t permit, and the value that is returned often doesn’t justify the price of the contract. Moreover, these types of offers tend to be very high margin business for the seller and might signal that the supplier-customer relationship has become “lopsided” in the supplier’s favor.
Specifying industrial products, managing vendors, creating efficiency
While there are instances where a more “consolidated” purchasing approach has its advantages, it’s time to start challenging some of these outdated notions and improve the way you 1) specify and select industrial products, 2) manage vendors, and 3) create efficiency in your operations by exploiting some of the same advantages we’ve realized in the consumer sector. A more “specialized” purchasing strategy – one that prioritizes selection of the best products, service, and support for each product category – can offer large advantages to customers searching for better operational efficiency, cost savings, reliability and uptime.
As an added bonus, companies will likely improve their supply chain flexibility, which for many has become a stronger priority as a result of the COVID-19 pandemic disruptions.
Although many companies have tabled continuous improvement and sourcing initiatives through the COVID-19 pandemic, it is critical companies begin identifying ways to become more efficient and more competitive.
What has your company done in your own operations over the past 12 months to improve overall competitiveness? Is this an untapped efficiency lever that can help challenge old thinking and revitalize continuous improvement efforts?
Jason Hoover, senior director of strategy and business development, Yaskawa America Inc. Edited by Chris Vavra, web content manager, Control Engineering, CFE Media and Technology, email@example.com.
Keywords: industrial automation, manufacturing goods, manufacturer purchasing
What is your company doing to improve their overall competitiveness and continue improving?