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Pennies Saved, Dollars Spent
Always keep in mind that when a deal seems too good to be true, it usually is.
Karen Auguston Field, Chief Editor -- Design News, April 26, 2004
Are companies going too far today in their pursuit of the lowest-cost components? Many design engineers seem to think so. They're concerned because they see their companies severing longstanding relationships with good suppliers in order to shave what is in some cases just a few cents off the purchase price.
They're even more worried about how this could compromise the quality of their designs.
Take the example of a Minneapolis-based firm that sourced some critical electronic components from China. According to the leadengineer on the project, his team did everything it could to vet the new supplier. They made an onsite visit, verified for 100 percent outgoing inspection, checked process-control data, confirmed the company's service and support record, and analyzed the integrity of the design.
Although the first few batches of parts met requirements and were consistent, over time the engineering team noticed a gradual degradation in quality. A few months into the project, they were forced to change vendors—costing them precious time and money in the process.
Unfortunately, what the firm's management failed to recognize was that the most expensive part isn't always the one that costs the most. In fact, when cheaper parts turn out to be of unacceptable quality—as was the case here—they can wind up costing a company significantly more money in the long run.
How much more? The true impact of substandard or poor quality components on a design is probably best understood by looking at net present value (NPV), the most common method for calculating a project's net worth or return on investment (ROI). It's also the way the bean counters justify making the switch to less expensive parts to begin with.
Because NPV takes into account the time value of money—by discounting expected cash flows—the true impact of delays, cost over-runs, and lower-than-anticipated sales resulting from quality issues can totally change the economic picture of a project. On the other hand, the added cost of a more expensive component can have only a slight impact on a project's NPV.
Quality, especially when it's perceived to cost more, can be a tough sell—especially these days, when companies are looking for any edge they can get in an increasingly competitive global market. So my advice: If your company is considering outsourcing parts, when evaluating the NPV, at least run the numbers for the "worst-case" scenario to be sure you can live with it. And remind management that when a deal seems to good to be true, it usually is.
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