At this point in time, very few people are still in the stone ages of Supply Management and buy on price per unit (PPU) alone, the first level of sourcing value. However, there are still a number of buyers in a number of organizations that still buy on landed cost or total cost of acquisition (TCA) and buy solely on the sum of price per unit, transportation, duty, tariff, temporary storage, and other costs that are incurred from the time an order is placed until the time the product is received. These organizations are still in the dark ages of Supply Management and need to find the light very, very quickly. Most modern Supply Management organizations attempt to buy on total cost of ownership (TCO), the third level of sourcing value.
The most commonly used metric today by analysts, consultants, vendors, and (I’m sorry to say) bloggers, it is a comparative cost metric that quantifies the overall cost of each acquired unit from a direct, indirect, and quantifiable market perspective that takes a broader look at the cost of a product from an acquisition, utilization, and delivery perspective. In addition to the landed costs, it also considers indirect utilization, supplier switching, and transaction costs as well as cost adjustments for quality, waste, and brand power (if your supplier has a brand that increases the selling price of the product you create with the component). TCO captures the ‘true cost’ of a product (or service) from a supplier and does a much better job of helping you to compare apples-to-apples when determining the best buy for your organization. It’s not the ultimate metric, as that’s total value management (TVM), the next level (and pinnacle) of sourcing value measurement, but you cannot apply TVM until you have mastered TCO (which is a big component of TVM just like total cost of acquisition is a big component of TCO). Plus, the effort required to apply TVM isn’t worth it in all categories. If the category is low-spend, non-strategic, or best handled in a leveraged purchasing agreement, you don’t bother with TVM. (Just like you don’t bother spending hours looking for the absolute cheapest supplier when buying a box of printer paper for your home office as saving $2 isn’t worth hours of your time, you don’t bother with an advanced analysis on the office supplies category.)
An in-depth understanding of TCO, and how to negotiate on TCO, is vital to the success of your Supply Management department as your organization’s success ultimately depends on the proper application to every category you source now that we are returning to (rampant) inflationary times. To assist you in the acquisition of this knowledge, Next Level Purchasing is hosting a webinar on How to Negotiate and Buy on Total Cost of Ownership this Thursday, May 30, 2013 @ 8:30 am PDT / 11:30 am EDT. It’s free to all NLPA (Next Level Purchasing Association) members, and basic membership in the NLPA is free! (Join Here!)
The webinar, which will be presented by Todd Snelgrove, Global Manager for SKF Group, will teach you how to reduce organizational costs by managing TCO. You’ll learn about updated strategies, techniques, and TCO-reducing
methodologies. The webinar will delve into real world case studies and share the experiences and pitfalls to watch out for. You’ll leave this webinar with a firm understanding of the do’s and don’ts of buying on TCO.