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How to Move the Needle in Procurement with “Total Cost of Ownership”

Author: Christoph Zacharias

Why total cost of ownership in procurement matters so much    

The total cost of ownership (TCO) approach to evaluating an organization’s spending focuses on the long-term costs and expenses incurred over the useful life of a product, all the way up to its ultimate disposal. The direct costs that enter the TCO equation include raw material and component costs, salaries and wages paid to workers directly involved in product manufacturing, as well as cost of items incidental to the production of specific products. The cost of fixing or maintaining shop floor assets is another direct cost component under the total cost of ownership in procurement. The indirect side of the TCO spectrum comprises costs such as rentals of offices and warehouses, admin salaries, office supplies, and various fringe benefits. Usage-based costs such as of energy, water, and sewage, as well as internet and telecom are other instances of indirect TCO.

Initial purchase price today is like that plain vanilla, and the present-day life and times demand a more end-to-end take on product costs. Essentially, by considering spend analysis through the prism of TCO, procurement managers get a comprehensive view of all costs associated with the lifecycle of an asset. In sum, the TCO in spend analysis is arrived at after considering all pertinent costs – direct, indirect, and intangible, all included. With all relevant spend metrics at their fingertips, chief procurement officers (CPOs) can make more effective and evidence-based decisions. Read on to know more about why the total cost of ownership in procurement is topping the corporate agenda virtually everywhere.

What more you can do with a TCO-based approach

Trim costs in many ways

By providing an aggregated view of product cost, the TCO outlook on organizational spend enables procurement professionals to pin down additional areas for cost reduction in the procurement process. For instance, a TCO analysis will help identify areas in procurement for automation and process standardization. Such steps will relieve the procurement process to a great extent of manual tasks, human errors, delays, and effort duplication. Besides, TCO-led automation and standardization of procurement processes is forcing out redundancies to straighten out workflows, which again means reduced cycle times and costs.

Cut better deals with supply chain participants

Purchase consolidation, made possible by thorough analysis, based on total cost of ownership in procurement, will give CPOs more headroom at the negotiation table with the supply side. Obviously, this results in more volume discounts and cost savings. Backed by metrics like never before on the “actual” cost of ownership, procurement specialists can snatch up better deals and more favorable terms from even the most unwilling suppliers. By now, most vendors would know that procurement organizations have the means to work out the TCO for competing suppliers and channels and pick ones that offer great value for dollars! So, from a negotiation standpoint, decision makers have a good deal of clarity about what they want from their consultation with their suppliers. TCO involves careful quantification of supply chain metrics. Armed with that sort of granular data, businesses don’t just talk to supply chain participants but get them to actually do things such as providing superior quality assets that require less servicing.  

Make better purchase decisions overall

TCO analysis is already having a big real-world effect on many procurement departments. CPOs now reckon the viability of a potential product purchase based on whether or not the benefits gained from owning and using a certain product trumps its TCO by a healthy margin! So, estimates based on total cost of ownership in procurement enhance organizational “buy decisions,” on the whole, by delivering lifecycle view of cost from product purchase to eventual disposal.

How SpendEdge can help you

This section will highlight solutions or how procurement helps and majorly highlight how SpendEdge plays the major role.

Cost optimization should be a core objective for any enterprise, and experts at SpendEdge excel in enabling businesses to realize this by relentlessly identifying expenditure patterns and conducting end-to-end spend analysis. Mindful of this, we apply a broadbrush TCO approach to procurement contexts instead of taking a narrow “initial purchase cost” view. Ours is a specialized line of action in the procurement discipline that goes beyond the all-too-obvious surface-level data to discover invaluable insights in spending behavior. To this end, our experts sift historical expenditure data using state-of-the-art tools to uncover cost-saving opportunities that lie hidden from common view.

Our experts help CPOs and procurement leaders root out inefficiencies and recommend strategic actions to energize their procurement function. With highly precise and data-based methodologies, our practitioners put more power in the hands of decision makers. The object is to help CXOs get the most value from their cost-reduction efforts and enhance their organization’s financial performance. Collaborating with us, many organizations have succeeded in improving their competitive standing in relation to their peers in the market. Suffice to say, our approach, predicated on total cost of ownership in procurement goes beyond traditional “vanilla” sourcing methods, and this enables our clients to optimize vendor relationships, negotiate favorable deals, and discover newer opportunities to improve their procurement processes.

The procurement process at a consumer business shines as TCO-led approach spurs spend performance  

Our client is a recognizable name in the household cleaning products segment in North America with operations extending to several global markets. The company’s product lines include hand soaps, bathroom cleaners, multipurpose cleaners, bleaches, and oil-based cleaning concentrates, besides microfiber cloths and various cleaning tools.

Around the time the client turned to us for assistance, the business was trying to deal with a bunch of crucial issues in its procurement function. First things first. The household products business lacked adequate line of sight across various spend categories. One thing led to another. Low visibility of procurement data for various products gave rise to human errors, off-contract spending, workflow redundancies and delays. Spend overruns were the net effect and these were on the rise. The business struggled to identify cost opportunities lurking in its data blind spot.

Our team with years of experience in strategy support soon persuaded the client that it was in their best interests to shift from initial purchase cost analysis, a practice past its prime, to a more comprehensive one based on total cost of ownership in procurement. The former is just skin deep while the latter, as we all know, takes the entire product lifecycle into its sweep. In the process, it covers a lot of ground, from first-time purchase, deployment, and usage to final retirement! Our team next proceeded to conduct a thorough evaluation of procurement costs. All expenses associated with the products through their lifecycle entered the big picture. Even the so-called hidden costs weren’t spared!

Our efforts brought home the issues in the client’s procurement function and the importance of applying a healing touch without losing time. Our analysis, grounded in total cost of ownership in procurement, helped the client uncover waste and inefficiencies and reduce needless spending, thus making the most effective use of procurement spend. By identifying every single cost component associated with a certain product, our experts standardized the procurement processes around it. Our custom solution, predicated on TCO analysis, helped the client achieve substantial cost savings and significantly improve profit margins.

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