Wie fit ist Ihr Einkauf?

In a series of ten regular posts published by the Procurement Leaders Global Intelligence Network I looked at the different facets to transform procurement to a partner of choice

Part 7 - Total Cost of Ownership

2013-06-02 09:27

May 2013

Thought Leaders is a series of regular posts from experts from across industries and regions, looking at the issues procurement faces today. This is the seventh in a sequence of posts by former Deutsche Post DHL CPO, Hugo Eckseler looking at new and innovative solutions to pave the way to the next performance level in procurement.

When did the concept of TCO emerge?

According to an interesting article by George Goodall that I encountered recently it dates back to at least 1929 when the term was noted for the first time in the "Manual of the American Railway Engineering Association".

Today, TCO is a constituent of every procurement textbook and used by professional category managers as a methodology and philosophy which looks beyond the price of a purchase to include many other costs along the entire life-cycle of a product or service. According to the last Roland Berger Purchasing Excellence Study it belongs to the top 5 strategic priorities of procurement leaders.

In Wikipedia the principle is explained by an example from the transportation industry: the cost of owning a vehicle from the time of purchase through its operation to the time it leaves the possession of the owner includes some key cost elements like depreciation, fuel consumption, insurance, financing, repairs, taxes, maintenance and downtime costs. Comparative TCO studies between various options help business units choose a vehicle to fit their needs and budget.

A solid and meaningful TCO study requires a systematic determination of all relevant cost drivers and reliable cost data for each of these elements. And it needs a thorough assessment of potential interdependencies between the elements: outsourcing of vehicle maintenance to third parties may reduce maintenance costs but may increase downtimes and be even more costly at the end.

It is clear that such assessments go beyond the expertise of procurement and need the involvement of users and other internal and external partners. Sammy Rashed called this approach "Total Cost-base Management" in one of his Procurement Leaders blogs []. Such a job is a challenge for procurement managers but at the same time an opportunity to demonstrate cross-functional process capabilities from "cradle-to-grave" and a good understanding of business needs.

It’s important to note that each of the cost elements in the Wikipedia example has a direct and measurable impact on the bottom line of the business. Such focus on the main cost drivers is key from my point of view to ensure a "lean" TCO model that is well understood and accepted by all business partners and that allows effective controlling for each cost element.

Important to note as well, that there is something "beyond total cost". Let’s have a look at the total cost-base management example outlined by Rashed in his blog: the centralised ordering of promotional items via an offshore location, the standardisation of items users are allowed to buy and tapping directly into low-cost sources reduced total cost significantly. Procurement seniors will probably agree that it’s a remarkable success to get such a stringent process in place and harness the "creativity" of dynamic marketers. Is it also a sustainable solution? I think that there is a fair chance as long as the "package" offered to the business units will meet up with reduced costs, their expectations regarding lead-times and flexibility to react on special requests, customising needs and fast moving local trends.

Although cross-functional total cost optimisation has already some decades on the hump, it’s more topical today than ever and one of the top procurement levers to contribute to the bottom line of the business.

Hugo Eckseler has been working more than thirty years as CPO and manager in manufacturing, logistics and quality management at Deutsche Post DHL, 3M, WELLA and other multi-national companies. Today he works as senior consultant looking for innovative solutions in procurement and supply chain management.

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