Case Study 1

The lowest quote won’t always make you the most money

This situation occurred over half a decade ago. We regularly discuss this supplier to this day. Note: the factory in question is not in the photographs that follow.

Scenario

Envest had been actively manufacturing a simple metal welded assembly for a client for years. The production was going relatively smoothly, however raw material, zinc plating and labour cost increases meant that margins were becoming slim. Subsequently, Envest was approached by a vendor at a conference claiming to have significantly lower costs than other suppliers due to a fully operational factory with preferred material costs, co-located plating facilities as well as lower labour rates. As a result, the vendor was able to quote a 50% cost reduction instantly. Envest actively followed up on the supplier lead, vetting the manufacturer through the Supplier Approval Process (SAP) including in-person audits. While the results of the audits and supplier reviews marginally scraped by, we still decided to proceed to sampling with the supplier so as not to miss out on a huge potential saving.

Result

After nearly one year of attempting to complete the Production Parts Approval Process (PPAP), Envest had to abandon all capital and time invested into the supplier. In the end, the supplier had misrepresented available resources on all levels - business management, engineering, quality control as well as fixed assets to conduct the manufacturing and quality control plans. Resources that were depicted in upfront audits were borrowed from sister-companies, and the in-person factory tour was conducted on premises that were ultimately not available to be used by our product. In the end, Envest explored the possibility of helping the supplier invest in assets, train personnel and bring the supplier’s capability up to an acceptable level to be able to manufacture the part. In the end, the costs to perform these improvements would more than double the cost of the parts, eliminating any potential savings and even potentially making the cost more than continuing to work with the original supplier.

Solution

In the end, the old adage usually holds true “If it’s too good to be true, it probably is”. Beyond that, Envest reviewed all of its SAP processes rigorously. More specific and pointed questions regarding production activities, available resources and company background are obtained before a supplier is approved for sampling. If these pointed questions are not met or are refused by suppliers; they are immediately culled from the vetting process without exception. Furthermore, we have learned to lean more heavily on our capabilities to predict the actual costs associated with manufacturing. By breaking down an injection moulded, sheet metal, or glass component to its constituent materials and processes we are often able to predict target costs within 5 to 10% of the ideal quoted value. If a supplier is able to quote under these predicted costs, a major red flag is raised and we approach these vendors with immense caution. Outlier quotes are usually just that - outliers, very rarely are significantly cheaper quotes from fly-by-night suppliers going to make you any money.