The Four P’s Of Vendor Costs

When you look at a vendor’s invoice, do you ever feel like you are missing something? Is there a difference between the total on the bill and how much it really costs?

Every company should review their expenses on a routine basis. (We do this via a Buying Excellence Payables Review.)

But the bills you pay are not the full picture of your cost. They’re more like a dinosaur skeleton: they show you the past, and give you some clues, but you only see part of the animal.

To get the full dinosaur – and a true understanding of total cost – you need to look at all Four P’s of Cost:

Planning
————— People
————————– Process
————————————– Purchase

Let’s take a look at them all in detail:

Planning

Your big decisions set the stage for your cost structure. What business you compete in, where your offices are located, which products you launch and when you launch them… these are the largest drivers of cost and often the longest-term commitments.

People

Every employee has a cost, and for some it’s far greater than their compensation. The wrong person on your team costs you far more in productivity than you may realize. For your best people, each hour is a precious, finite resource worth protecting.

Process

The time, complexity, and risk associated with each business process all imply cost. Have you automated, routinized, and documented your operational activities so that investment will decrease?

Purchase

What you buy, from whom you buy it, and how much you pay are data that show up on the bills and the payables report. This is the easiest place to start, but it is more often the tail than the dog.

 

This is IMPORTANT: if you base decisions only on the purchase price, you may miss most of the cost.

 

FROM CONCEPTS TO ACTION

To apply this, identify the biggest purchase or business decision you will make next month. What is the impact on each of the Four P’s?

The questions below the dashes will get you started: copy them into an email, take ten minutes to jot down your initial thoughts, and then send it to your team for their input.

 

For more explanation, download The Four P’s of Cost… and the Cost of a Jerk and feel free to share it with your team.

 

STARTER QUESTIONS – REVIEWING THE FOUR P’S OF COST

PLANNING

What strategic decisions are driving the cost?

Do we need to revisit our top-down approach to this in any way?

Are the hands-on leaders held back in their effectiveness because of C-level decisions?

 

PEOPLE

Will we need more people to take this on, or will we be off-loading work with this move?

Will it have any impact on our FTE count? (More, or less, and how many?)

What skills do we need on our team that we may not have now? What current capabilities will be less relevant?

Will our current FTEs have more or less work to do because of this? How many hours per month?

 

PROCESS

What processes will this affect, and how?

What will it simplify? What will it make more complex?

Where will it add risk?

Will it make us more automated, or less?

 

PURCHASE

How much will we pay the primary vendor for this?

How does that compare with what we are currently paying?

What other vendor expenses will be affected by this move? Will they go up, or down? By how much?

 

Here is more great information to help you save on your vendor costs:

Three Steps To Saving Your Company Money: How To Compete Purchases

Learn To Clear The Fear For Better Team Decisions

Get your free Savings Kit and additional resources:

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