Total Cost of Ownership (TCO) is a concept that has been associated with supply chain management for decades. The idea is that the cost of owning a product is broader and more encompassing than simply the initial price paid for the product. Generally speaking, TCO is comprised of two main cost categories: the costs associated with purchasing a product, often referred to as Total Cost of Acquisition (TCA), and the costs associated with operating and maintaining the product through the life cycle. It is imperative that companies understand TCO, TCA, and operating costs in order to have a clear picture of cash flow and the expected spend profile over time – leading to optimal capital and expense funds management and opportunities for growth. This information enables companies to properly assess potential business deals and make decisions based on sound data – without incurring any “surprise” costs along the way.
Many companies find it daunting to calculate and optimize supply chain costs, such as TCO and TCA. At Chainlogix, our supply chain management services are designed to help clients decrease total cost of acquisition and improve operations efficiency. We use our experience and know-how to create custom supply chain solutions that are tailored to our clients’ specific needs – leading to lower risks, reduced TCO and TCA costs, and improved customer relationships.
Costs Included in Total Cost of Acquisition
The remainder of this article will focus on Total Cost of Acquisition. There is not a universal list of TCA costs but as a general rule of thumb: TCA costs are upfront expenses including the initial purchase price as well as any costs incurred to get the product to the point of use.
Some TCA costs are obvious while some are tricky to identify – or may even be hidden. Below are some key costs that should be included when determining total cost of acquisition. It should be noted that the following are some of the most common costs in TCA but this is not an exhaustive list.
- Purchasing the Product: the purchase price of the product is typically the largest component of TCA. This cost is sometimes able to be reduced depending on volume discounts, standardization of the product, or negotiations.
- Purchasing Personnel Time: this cost includes the personnel time required to research and evaluate various supplier options, evaluate proposals, select the best option, negotiate a contract, place the order, and communicate with the supplier during the purchasing process. If personnel need to routinely update or expedite the purchase order, additional time should be factored into the TCA estimate for these activities.
- Logistics & Transport: depending on the nature of the purchase, the logistics and transport activities may be straightforward, or very complex. The costs may include packaging, warehousing, freight rates and shipping, and delivery fees. Import fees and insurance costs should also be included.
- Logistics Personnel Time: this cost represents the personnel time required to arrange, coordinate, track, and oversee the logistics and transport aspects of the purchase and delivery.
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- Installation: once the product arrives on site, there may be installation, testing, or commissioning costs to factor into the TCA. This should also account for any personnel time needed for upfront training.
- Margin Stacking: in general, each member of the supply chain adds a layer of cost or profit margin, a process referred to as “margin stacking”. These layers of cost should be account for as they result in a higher total cost of acquisition for a given product. As a general rule of thumb, companies should minimize the number of suppliers in the supply chain, removing the “middle men” and reducing the potential for margin stacking – leading to significant cost savings.
- Accounting Personnel Time: with any purchase there is the associated personnel time necessary for accounting activities such as accounts payable.
- Managing Inventory: inventory management costs should also be included in TCA estimates as optimal inventory levels lead to lower warehousing and transportation costs. Conversely, inefficiencies within the inventory management system affect overall cash flow and lead to higher TCA.
- Contract Terms: the terms of the contract may not seem like items that would impact TCA but these can have a large effect on cash flow. For example, terms such as invoicing frequency, payment terms, or dispute resolution, all impact cash flow and should be factored into the total cost of acquisition for a product.
- Overhead: every TCA will include some degree of overhead costs. These costs vary significantly depending on the nature of the purchase and your specific organizational structure.
- Other: there are lots of various other costs that may creep into your TCA. For example, there may be bank charges, foreign currency considerations, taxes, or advance payments that are required for your given purchase. You may also wish to include some contingency cost. This category is often where the hard to identify or hidden TCA costs are located – and unfortunately, some of these costs can be significant so it is crucial that companies do their TCA homework.
Since first opening its doors in 1988, Chainlogix has been an industry leader in creative, engineered solutions for manufacturers. Our highly experienced supply chain professionals assist in every step of the manufacturing process, from design to production of quality products. Through our strategic partnerships, firm commitment to unsurpassed customer care, worldwide sourcing capabilities and offices in the USA and China, clients achieve a sustainable reduction in their total acquisition costs and build supply chain resiliency.
At Chainlogix, we’ve spent years cultivating relationships with proven suppliers and securing the most competitive prices for our clients. We proudly offer the best custom-tailored solutions in the business, and with exceptional customer care that places a high emphasis on human relationships and human connections.
We serve clients across a broad range of markets including industrial and consumer electronics, industrial machinery, telecommunication, lighting, and construction. Our services encompass all areas of the procurement process such as:
Contact our team today at 833-874-6635 to see how we can help with your supply chain management.