AIDC and RFID Thoughts from Allied Integrated Services

Purchase Price Variance (PPV)

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Purchase price variance is an accounting measurement. The actual price of a procurement is compared to an accounting standard price.  If the price paid is less than the standard price there is a favorable PPV.  If the price paid is greater than the standard price it is an unfavorable PPv. 

Sometimes there is no formal standard price established for the buyer.  In this case "best" price found on the internet is a popular substitute target.  Another alternative is just to pay less then the average price paid before.

Are Supply Chain Buyers influenced by PPV? 

It is frequently stated that if a repetitive process is measured it will improve.  My perception is that the improvement will be greater if a personal incentive is attached to the measurement. Improvement will be realized regardless if it is in the best interest of the total supply chain.

In any supply chain supporting a US manufacturing company there are at least two critical departments; procurement and manufacturing. For our discussion the assumption is that owners of this supply chain have incorporated products and process improvements from the technology of Automated Identification and Data Capture (AIDC).  This allows to use a simple example of the procuement of a printer ribbon used to generate bar code labels.

If you did a google search for barcode printer ribbons for a Printronix P5205 or a Zebra 110x4 how many hits do you anticipate you would get?  Several pages!  You would also observe a wide spread in pricing from various suppliers for prodcuts ranging from the manufacturer's recommendation to compatible to other.  To a person who does not use the equipment on which these ribbons will be installed  the perception is ribbons are a generic commodity.   Analogous to gasoline for your automobile if the car starts all brands are the same only the price charged is different. Right? Have you ever heard "You get what you pay for it?"

So why pay a 5 to 20% premium for the OEM recommended ribbons?

Assuming the buyer then buys the cheapest ribbons available what are the potential affects on the links in the supply chain:

• The buyer records a favorable PPV and maybe points toward their periodic bonus
• The user who installs the ribbon experiences:
• worse print quality from the start or sooner than when using the manufacturers recommended ribbons
• if this is a thermal ribbon premature print head failure occurs ($$$ to resolve) 
• if this is an impact printer ribbon premature shuttle problems or failures due to ink and or fiber accumulations($$$)
• The production manager experiences:
• an unfavorable labor variance because of downtime while the printer is awaiting repair
• unplanned repair expenses due to premature mechanical failures
• potentially missed ship dates
• employee moral can be impacted because they can not do their job
• The company experiences:
• Unfavorable goodwill with the customer if the product arrives late or the compliance labeling is not acceptable 
• Negative impact on the company when the customer accesses fines or de-merits in their vendor performance measurement system.

The key point is that the current measurement of PPV is only for the price variance on the purchased item.  There is no subsequent evaluaton of how the quality or performance of the item purchased affects the product or service into which it is incorporated.

In Quality Assurance circles there is a maxim that the farther removed from the source that a defect is found the more costly it is to resolve.  While a favorable PPV may be realized in the absence of subsequent favorable performance measurements the net outcome is unfavorable to the supply chain and the company.

Less incentive needs to be put on favorable PPV until it includes a measurement of subsequent performance of the item as it is utilized.

What can you do?  I endorse reconsidering buying OEM supplies based on performance measurements after integration.  Manufacturers of quality products use the latest technologies to maximize performance based on extremely rigoruous tolerances.  To assure the intended performance and longevity of the equipment they sell their recommedation and sometimes requirement is to use the supplies they specifiy.  Frequently the designs, materials and manufacturers processes are protected by patents.  Admittedly the resulting price may be higher as they have to amortize their design and production cost.  The manufacturer of the clone products usually do not invest as much into the quality of their processes, material and mimic designs to produce a compatible product.  They also do not warranty the products that may fail as a result of from the use of Non OEM supplies.

Overall its the reduction of total cost that improves profitability.  If a favorable PPV is costing more to fix later it is not favorable for the entire supply chain.

Allied Integrated Services is an integrator and reseller of AIDC software, hardware, supplies and repair services. Our goal is to maximize equipment uptime by selling quality equipment and providing service using OEM parts and supplies. As a reseller of premier AIDC printers from Datamax, Intermec, Printronix, Sato and Zebra we are frequently retained to restore critical to the process equipment for customers.  We  summarize the collective impact off a favorable PPV for customers by using the two old adages of "Pay Me Now or Pay Me Later" and "Pennywise but Pound Foolish"