What does Deming mean when he says

We should end the practice of awarding business on the basis of pricetag alone.

Maiju asked me to elaborate, and this is my understanding of it. In manufacturing, which is the context Deming uses in his Out of the Crisis book, the idea is that you are providing a service to your customer. It really is in your interest to ensure that your customer gets your product at the highest quality. If you have suppliers then they too must have this same vision. It will cost you if your suppliers provide you something that is sub-par. In a world driven by accounting, and its vagaries, it is inevitable that costs after the fact are not accounted for. I need 3m washers, let me pay 30c for it and get it from China rather than 40c for it from Michigan. This decision is made in isolation. Later on, you realize that there is greater risk in the cheaper product. Quality is one, on-time supplies is another. A small part like this can have a significant impact on your ability to deliver. The idea of getting 3 quotes and choosing the cheapest is retarded. But common.

Take a look at this.

Engineers have traced it to improper instructions on what type and length of fasteners to use on certain titanium parts.  The fasteners, located throughout the airplane, were installed primarily by suppliers at the factories where the major sections of the jet are being built, and affect all of the fuselage sections built so far.

Japanese manufacturers, at least the lean ones, have a relationship with their suppliers that is almost counter-intuitive. They might even go out of their way to help their suppliers at the cost of their production goals. Toyota is very good at that. The reason for this, apart from the humaneness of lean, is that they want to make sure that their products are the best. Squeezing your supplier doesn’t make sense because this means that they will cut corners. In the long run you will lose out. Of course, quarterly results are not as much of a concern there.

Now look at software. I find a budget-based funding of projects insufficient in making decisions. Most people say, how much do I have in my piggybank and then decide what to spend where. It really is difficult to calculate ROI and the effectiveness of an IT project. This means that a budget of a few million is spent on projects that may not have a positive ROI.

Another issue I have with budget based funding is that it doesn’t look at the picture as a whole. We have funding to buy an off-the-shelf solution but not to provide our developers with the best of machines. We know that the key to long-term success is the ability to think and act systemically.

Is it cheaper to pay a software supplier $25/hour for a developer or $150/hour for a developer? It depends right? So if you had a “budget” of $500,000 and someone quotes $520,000 and someone else $300,000, who should you go with? Again it depends, right?

A developer working in the same building as you is worth more. An experienced developer who is focused on delivering and understands good engineering practices is worth a lot more than a college grad. Productivity gains? I have heard 10X productivity gains can be made.

What does the $300,000 get you? What does the $520,000 get you? Will you have the ability to modify scope? What’s the quality going to be like? Are the teams going to work together in the same room with you? How well will they understand your requirements? Will they commit to something? What is the cost of having multiple vendors in the same project? Would you rather work with the same supplier? Do you trust one more than the other? The practice of asking for 3 quotes and choosing the cheapest was created in an environment devoid of trust. There are not too many places where this will work well.

Hence, awarding business on the basis of price alone doesn’t make much sense. As with all else, you benefit by building long-term relationships.