Companies Are Continuously Seeking Ways to Improve Quality of Production

question 87

Essay

Companies are continuously seeking ways to improve quality of production and reduce costs. One of the areas is to work with suppliers to improve the quality and reliability of parts and products shipped. In an article entitled "In Defense of Activity-Based Cost Management," Robert S. Kaplan says:
An ABC model can play a major role in improving supplier relationships as well. These relationships must be a vital part of any quality and cycle-time improvement program. A key insight is to use ABC to distinguish between low-price and low-cost suppliers. Traditional cost accounting, with its emphasis on purchase price variances, encourages purchasing people to continually scan the population of potential suppliers to obtain low price quotations. Most companies have learned, the hard way, that many of their low-price suppliers are actually extremely high-cost suppliers. (Source: Management Accounting: November, 1992)
Required:
(a) Explain what Kaplan means by "many of their low-price suppliers are actually extremely high-cost suppliers."
(b) What general prevention and appraisal activities can be used to improve the quality and reliability of parts and products shipped from suppliers?

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