8 September 2011 | Adviser Q&A
What costs do I need to be aware of when switching from one supplier to another?
Supply and raw material planner, Botswana
David Pomfret, director, 105 Consulting
Switching costs can be significant, depending on whether the supply is for goods or services, standard or bespoke, and on the level of criticality to your organisation.
Some will be certain and known, others will be financial risks with an associated degree of uncertainty. These can include: field trials or testing for the incoming supplier/product; or any parallel running of service as the new supplier operates alongside the outgoing company.
There will also be physical costs, such as changes to IT systems or restocking new spare parts – and possibly disposal or writing off the costs of old spares. And there could be people costs, such as re-training staff or the implication of transferring staff under TUPE regulations.
There may be costs associated with intellectual property transfer or licensing, changes to tooling or packaging, asset transfer and extra charges for logistics. And there’s the risk of under-performance by both the outgoing supplier and the incoming supplier as they scale the learning curve and tune service performance accordingly during the early phases of the contract.
John Crawley, outsourcing procurement manager, Martindale Pharma
For commodity items with a large choice of suppliers, the costs to consider are basically the price you pay for the product in question to be delivered to your premises.
On more strategic products – finished goods, semi-finished goods, printed packaging – there are other costs, including:
• Tooling costs. Does the supplier need to modify its production line to provide the product you need? Is this included in the price? If so, what is the percentage of the price to you?
• Technology transfer costs. If a contract manufacturer is making a product on your behalf you will need to provide it with the details of producing this. Do they need to do trial runs? If so, are you able to sell the products it makes from this? Who pays for that or is it included in the price?
• Regulatory costs. In a highly regulated area, if you make changes, even of supplier, you need to inform the appropriate authority. The largest cost is not necessarily financial, but rather the time it takes, especially if a forced change.
Fred Azalbert, partner, EC Harris Oil & Gas
Assess to what extent the supplier’s performance meets the organisation needs and expectations and how critical its supply is to your operations. Several one-off expenses are unavoidable – transaction, compatibility, training, setting up the contract on technology and market research costs. Recurrent costs will run throughout the life of the contract and need to be identified and quantified at the very outset.
Change should take place during an appropriate window in order to minimise disruption to operations.
Develop a strong knowledge of market conditions to help identify suitable suppliers and to anticipate upcoming trends. This is particularly applicable for those commodities/services that are business critical and subject to high volatility.
Alternatives to switching suppliers should also be considered. For instance, if cost is the only driver for change, a contractual renegotiation with the incumbent might achieve the desired outcome. Another option might be to dedicate time and resources in developing the incumbent’s capability to improve their overall performance.
Key facts
1. Consider physical costs, such as IT systems and people costs, such as training.
2. Inform the appropriate authority if working in a regulated area.
3. Look at alternatives to switching. It may be worth spending to improve the incumbent’s performance instead
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