Total Cost of Ownership (TCO)
Although total cost of ownership has been part of the purchaser's toolbox for years, it is understood and applied to varying degrees. TCO encompasses all the costs arising from the purchase, utilization, maintenance, and ultimate disposal of a product within a company. Anyone who Investigations all the influencing factors will acquire insights that help in comparing two suppliers. Hidden costs, which often far exceed primary costs, will become visible. Only then can meaningful comparisons of suppliers be made and effective sourcing strategies developed.
In the best case, the TCO strategy can lead to value creation partnerships whose focus is not exclusively on price reductions. TCO also helps to eliminate activities that do not contribute value from the life cycle of a product or service. Furthermore, the savings possible through strategic procurement can be more accurately predicted by TCO than by other means. The process is simple and follows logical rules.
The first step is to define all relevant costs (particularly material and production costs) and cost drivers, and then calculate the costs for each part. Integrating the TCO strategy at an early stage of a tendering process will allow basic costs of the company to be completely depicted, which in turn allows RFPs to be compared.
All in all, a disciplined and structured approach is critical in focusing on those cost components that can be most easily influenced. The application of TCO is particularly worthwhile in certain areas:
Transportation: What is the cheapest method for shipping materials, and how does this differ from the current method? Can packaging material be returned, for example?
Parts logistics: How can parts logistics in the production process be improved? How can the throughput time of parts deliveries be shortened? How can inventory costs be reduced?
Set-up times: What causes the longest set-up times? Are there other machines that could be used in order to shorten set-up times?
Production process: How should volumes be changed so as to justify either a manual or an automated process? What would be the most difficult, most expensive, most time-consuming component?
Administration / indirect costs: Is there a more efficient interface with ordering systems? What could be achieved by changing the duration of contracts?
It will be clear by now that TCO should be part of any sourcing process. Only then can total costs be meaningfully included in all deliberations. This especially applies to the procurement of sophisticated capital goods, the pooling of procurement for the whole company, and the consolidation of redundant parts numbers.
A total cost overview can also produce many positive effects in other areas. Contract damages can be avoided, simulations can be used in advance of prototyping, and returnable packing materials can be employed, for example. Other possibilities are the use of Electronic Data Interchange ( EDI) or a simple evaluation of the profitability of individual suppliers.