One of the most important people in your company may not even be in the room when you make big procurement decisions. If you choose a supplier and don’t have a supply chain manager in the conversation, you run the risk of taking on a contract that will leave you wanting.
Too often, supply chains are afterthoughts, and initial costs are the focus of procurement. However, the “per piece price” mindset covers only a fraction of the total cost of ownership (TCO) over the full life of an item. Remaining aware of TCO can help organizations make every budgeted dollar go further.
The benefits are often ongoing
Simply stated, the TCO approach asks you to consider your entire business and not just single costs. Then the equation can shift from saving money on a part or tool’s initial cost to developing cost savings that can be realized on a reoccurring basis.
With a mix of hard and soft cost savings, TCO’s benefits come in the form of freed-up time and additional production from existing resources.
TCO solutions are aimed at chipping away at the total cost of ownership. The goal is to find a way to do more with less: to manage inventory more effectively, to streamline processes, and to eliminate waste.
This is particularly important when it comes to MRO, where piece price can typically represent less than 50% of the total costs associated with low-dollar, high-use supplies. (Think of safety goggles or earplugs.) And while commodity pricing is a key element, an even greater savings opportunity can often be found in the many indirect costs associated with acquiring, owning, and managing inventory. Some strategic TCO partners in the market today will assume that work and those costs – thus alleviating you and freeing up savings that can be reinvested in growth-driving areas of the business.
AREAS TO CONSIDER
Nothing has a single cost. Think of these factors to help develop a TCO mindset.
- Purchase Price: The price paid
- Acquisition Cost: Time spent to research, order, receive, inventory, and disperse an item.
- Freight: Shipping and handling
- Operation: The cost of using an item, i.e. fuel or electricity
- Maintenance: Any costs associated with maintaining, repairing, and servicing
- Lifespan: How long an item will last before it needs replacing
- Additional Costs: Financing, any disposal fees, and insurance or warranty
Every Step Should Add Value
If there are steps in your workflows that do not add value to your end-user, how can you reduce or eliminate those steps? Quality Assurance adds value because it ensures defects aren’t reaching customers. How does stocking parts add value? Often, it doesn’t.
Finding a third party to handle that work means your employees have more time to do what they do best: create your product, serve your customers, and grow your business.
Partnering with an expert can go a long way toward reaping TCO benefits. They can help you standardize what’s included in your TCO planning, set how results are measured, and regularly review how things are going. A truly strategic partner will share usage data with you to provide visibility so you can adapt and grow your business.
The Big Takeaway
There’s more to a purchase than the initial payment, and a TCO attitude can keep benefiting the bottom line. Even if a supply chain manager isn’t in the room with you for some conversations, that TCO mindset can be.
About The Author:
Besides TCO, Nathan Hassler also helps customers with supply chain solutions like Lean manufacturing, point-of-use inventory, and strategic partnerships. And as part of the team at Fastenal, Nathan is always working to help procurement professionals find new ways to become more productive.