The Cost Ratio Plan

Under this method, the vendor rating is done on the basis of various costs incurred for procuring the materials from various suppliers. The cost ratios are ascertained for the different rating variables such as quality, price, timely delivery etc. The cost ratio is calculated in percentage on the basis of total individual cost and total value of purchase e.g. the total delivery cost is Rs5000 and the total purchases are Rs 1,00,000 then delivery cost ratio will be

5,000 / 1,00,000 x 100 = 10%

At the end, all such cost ratios, will be adjusted with the quoted price per unit. The plus cost ratio will increase the unit price a while the minus cost ratio will decrease the unit price. The net adjusted unit price will indicate the vendor rating. The vendor with the lowest net adjusted unit price will be the best supplier and so on.

Under this method, the most strategic issue is the identification of various costs and their allocation among different variables and suppliers. Certain important heads of quality costs and delivery costs can be listed as under:

Quality costs:

1) Visit to vendor’s plant for approval of samples etc
2) Inspection costs
3) Cost of defectives
4) Reworking costs
5) Manufacturing losses on rejected items

Delivery costs:

1) Postage and telegrams
2) Telephones
3) Visit to vendor’s plant for expediting the delivery
4) Extra cost for getting quick delivery e.g. costlier means of transportation.

All the cost ratios are calculated for all the suppliers on individual basis. On the basis of the value of the each cost ratio, the consolidated rating of each supplier is done in the manner as explained in an earlier discussion.

Buyer Seller relationship: The continuity of buyer seller relations helps in fostering the mutual benefits. The development and maintenance of satisfactory supplier is beneficial to both the dealing parties – the buyer and the seller. In fact, purchase and sale are the two facets of a single transaction; however, it is possible to fulfill the mutuality of interest. The selection of the supplier is basically an impersonal action, but intimacy develops in the course of time. Such a relationship can be crated and maintained through the following actions:

1) Complete and clear communication as regards need, application and usage of the item, the scope of the product, and technical specialty of the product; limitation of the product; schedule of the probable requirements etc
2) Reciprocal understanding for each other’s problems and constraints
3) Mutual confidence in statement and intent of both the dealing parties
4) To be considerate of each other’s reasonable demand and elimination of undue demands.
5) Extended relationship beyond merely the contract fulfillment such as to suggest for cost reduction in manufacturing, packing, dispatch, usage, accounting etc
6) Elimination of all chances of avoidable inquiries and unnecessary expedition
7) Continuous improvement in ordering method at buyer’s end ad supplier services at seller’s end.
8) Cultivation of personal contacts through liaison activities.

The natural culmination of such warm relations is that representative of he seller becomes a member of the “buyer’s team” and conversely the buyer becomes an esteemed member of the “vendor’s family”. It should be noted that such mutual relationship does not weaken the position of either party but in fact it helps in identifying the area of integration of objectives of both the parties which helps in serving the interest of each other.

The loyalty towards the vendor always reaps some benefits in the long run. In fact, loyalty begets loyalty. The opportunism in buying or buying through “shopping around”, may generate some short term economic benefits. But in the long run such opportunism results in development of ill feelings and dissatisfaction in the course of time. The vendor assures the uniformity of supply, assurance of supply preferential allocation of quota under scarcity, valuable suggestions as regards probable position of supply and price, sympathetic treatment in case of crisis at buyer’s plant etc. The vendor loyalty does not mean that the area of competition is eliminated or the search for the better source is abandoned. It simply means that the established supplier is given an opportunity to work out the best terms of the deal that are consistent with the requirements of the buyer, without sacrificing the interest of the buyer. In fact, continuous change in the supplier not only increases the cost of buying, but it also indicates the lack of reliability of buyer from the supplier’s viewpoint which definitely proves costlier in subsequent buying.