The 2012 Kelley Blue Book Total Cost of Ownership Awards recognized two car manufacturers, Kia and Audi, as having the lowest depreciation, the lowest expected fuel, maintenance, and repair costs, and the lowest finance, insurance, and state fees for new models over the first five years of ownership. These companies found ways to optimize their costs to pass on savings to the customer, giving Kia and Audi a greater chance of profitability among their competitors while providing excellent value.
How did Kia and Audi become winners? As a purchasing manager, you probably spend hours trying to identify the right supplier, negotiating until you find the best possible price, and finalizing acceptable payment terms. However, other elements outside your direct control cause other problems.
The true success of your procurement process reveals itself only when you can account for all costs; that is, your total cost of ownership (TCO). The procurement process is not complete until the purchased items arrive at and are ready for use by your company. To ensure arrival, your company may incur additional costs, including handling, transportation, warehousing, and preservation of materials costs. Missing any element could severely change the profitability of that product for your company.
Yet identifying all costs is only the first step. To achieve a similar record to Kia or Audi, you must also reduce the total cost by examining the base commodity, predicting the costs for your suppliers, and calculating the complete outcome of the materials purchased so that you can compare those costs to the price you have negotiated. This process helps you identify if you are paying too much for supplies. Once you compare the cost of supplies to your own TCO calculation, you can predict the profitability of the product for your company.
Does your company’s procurement process run like a sleek, well-oiled machine? Can you calculate the TCO for your company’s products and compare it to the supplier costs paid for your base commodities? The Accenture Academy course Managing Cost of Ownership with Commodity Cost Modeling explores how to use commodity cost models to help you benchmark, compare, and improve your company’s TCO—and your bottom line.