What the TCO?
Total Cost of Ownership (or TCO) is the great concept in itself! And its greatness is in its simplicity. The experienced Procurement professional can’t get cheated by the low purchase price from potential suppliers! Because he or she knows – this is only the tip of iceberg!
But we shouldn’t take for granted that everyone in Procurement understands this concept and uses it at all times. After many years of being in Procurement I still get confused by low prices and great offers, which hide some extra costs. My 15 years of experience still don’t help all the time.
Compare apples to apples!
Why does Total Cost of Ownership is so important? Because it simply helps you to be more objective evaluating the costs!
Simplest example is comparing the prices between different companies. Let’s say we are making RFQ for new production equipment:
- Company A didn’t include the installation and delivery cost in the proposal.
- Company B didn’t include the cost for certification of equipment and education of our operators.
- Company C included all these costs AND added the costs for first service of the new equipment.
As a result we are not comparing apples to apples here. And before the judgement of prices – we would need to get the same base for comparison. And this is where TCO is the best solution!
What does Procurement guru say?
Here I would not find the better way to explain the beauty of TCO concept than Robert Menard has said once:
“Total Cost of Ownership (TCO) is the single most important principle in all of supply chain management… TCO quantifies and measures costs. The principle of TCO has impacted Advantageous Negotiations. This impact is by expanding the narrow confines of Price only negotiation to a vast field of opportunities for attaining Win-Win results. Anyone can get a lower price. But the object of good business is to attain the lowest TCO.
In professional purchasing, we can reduce the essence of everything that we do to a single word – Cost. So any discipline (logistics, inventory, purchasing, etc.) falling under the umbrella of Supply Chain Management can be interpreted and expressed in terms of Cost. The relationship between Cost and Value is that the Best Value means the lowest TCO.”
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Article by Robert Freeman
Procurement expert at Future Procurement
You can learn more about Procurement and Supply Chain Management at our web-site www.futureprocurement.net