Total Cost of Ownership

Lot’s of discussion around broadening our perspective beyond cost – but what do we mean.  Usually folks talk about TCO – again, what’s that.  Here’s a quick attempt to outline considerations:

Cost is not a dirty word although price may be. Often, people say cost when they mean price. Everything in supply management is essentially a Cost and ought to be captured under the broad umbrella of TCO. Supply Management is responsible for about 75% of the total COGS. In order to deliver supply management driven sustainable competitive advantage, total network costs must:

  • Go down more and faster than the competitions
  • Go up less and slower than the competitions
  • Stay the same while the competitions costs increase
  • Not just moved to other network members (typically suppliers)

Furthermore, costs are investments. Holistically, this includes, but isn’t limited to, the following COST OF:

  • Quality
  • Money
  • Opportunity
  • Data accuracy & visibility
  • Delivery / AOS
  • Network Inventory
  • Innovation
  • Reputation
  • Risk mitigation
  • Network optimization
  • Relationships
  • Honesty
  • Technical competence
  • Commercial competence
  • Usage, lifecycle, disposal, environmental impact
  • Administration

Let’s look at TCO more broadly than most definitions. Here’s a quick features list (similar to the above listing) and, as always, TCO acumen / success is a function of the quality of supplier relationships:

Straight forward elements:

  • Price including freight
  • Delivery performance
  • Quality performance

Quantifiable but often neglected:

    • End-of-life costs
    • Obsolescence
    • Shrinkage
    • Salvage
    • Admin

Sometimes forgotten – Cost Modeling

Often Bogus – Payment terms (pure trade-off; move versus change/reduce cost) & often inventory unless there is actual network reduction

Tough to measure but maybe most critical:

    • Innovation
    • Risk (mitigation and monetization)
    • Impact to the bottom line / peer comparison
    • Supplier Perception
    • Forecast (beyond accuracy toward visibility and Truthfulness)

——————————
Joe Sandor
Professor
Michigan State University
Lecanto FL
(517) 488-8931
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