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Why a $0.02 Part is as Important as a $1,000 Part

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Why a $0.02 Part is as Important as a $1,000 Part

There is a vast difference between managing a business through data in systems and managing it for the sake of customer value delivery. Procurement may be able to dissect operational production down to a two-dimensional list of suppliers, part numbers, and cost information in order to decrease risk or increase efficiency, but it is only as a cohesive solution that a product can be sold.

This brings us to why a $0.02 part is as important as a $1,000 part – if anything about the part affects the customer positively or negatively, then it does not matter what the price tag happens to be. We tend to assume that expensive parts have a correspondingly high value to the customer, and in many cases they do. We cannot, however, make the opposite assumption that inexpensive parts have a correspondingly low value to the customer.

Every part in a design requires management for its contribution to the availability, cost, and differentiation of the final product.

Availability

The most conventional item imaginable can bring an entire production line to a halt if it is not available on demand. Inventory management problems, quality issues, and supply chain disruptions can all prevent parts from being in place when they are needed. If this is the case, and a customer must be alerted that their delivery will be delayed, they are unlikely to care that it is only due to an issue with a $0.02 cent part. ‘Not available’ (and your company brand) are all they will hear and remember.

Cost

If a part can be purchased with two pennies, cost is not usually the first concern that comes to mind. What if, however, the cost of the part doubles – or triples even? $0.06 still doesn’t sound like a reason for alarm. However, the picture changes when quantity comes into the equation, rather than thinking of cost on a single part basis. An assembly could include tens, hundreds, or thousands of the part and the extended cost could change the entire pricing model. Similarly, an unexpected increase in costs could quickly swallow up your company’s profit margin and/or require a cost increase to customers.

Differentiation

One of the most critical attributes of innovation is that it is not always available to the highest bidder. It could be the additional or removal of a $0.02 part that makes your company’s product significantly better than the competition. In this case, the value proposition is unlikely to be, “Buy our solution because it uses this $0.02 part in a clever way.” Instead, a skilled sales force will speak in terms of the business benefits to the customer resulting from the inexpensive part. Perhaps it makes a machine run quieter, require less maintenance, or consume less input supplies. Any of these could make the difference in a contract decision.

At the end of the day, the reason your company manages multiple parts is because the way you assemble, employ, or alter them creates value for the customer. The $1,000 part has no value at all unless the $0.02 part is also available on time, at the right cost, and able to serve the purpose it was included in the design to fulfill. The $0.02 part is not captured by its price alone, but rather by what the company is able to achieve through it.


 

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