It’s not easy to minimize total cost of ownership, is it? According to a 2016 benchmark report, over 50% of Procurement Executives said that total cost savings was one of the most important metrics by which Procurement’s performance was measured.
It’s a common and incredibly important challenge in Procurement.
When you adopt strategic sourcing best practices, one of your main objectives is to minimize total cost of ownership. It’s one of the best ways to save money for your company.
Learn How to Minimize Total Cost of Ownership
There are many important factors to take into account when you’re trying to minimize total cost of ownership or TCO.
This post will cover 6 of the more critical ones to consider when you’re looking at the TCO of a particular purchase.
The up-front costs may not always be the most significant when weighing all of the cost factors in the total cost of ownership. But if you’re able to find ways to lower your up-front costs, it might make it easier to deal with the other costs associated with the purchase.
Effective negotiating is one way you can lower the up-front costs. Also, if you are able to consolidate your vendors and increase your buying power, you might be able to reduce your up-front costs.
Storage is another important factor in determining the total cost of ownership. As a matter of fact, in many cases, the cost of purchasing a particular item might be much less than the cost of storing the item. Because of this, you must ensure that your storage facilities are optimized in a way that minimizes the cost of storage an item. Of course, the cost of storing an item will depend on what the item is. For example, if it’s an item that has to be kept at a certain temperature, there will probably be costs associated with maintaining that temperature.
Sometimes you might need to purchase a piece of equipment that requires employees to be trained in its use. This can include machinery, vehicles, or software.
When you’re considering this type of purchase, you’re going to have to figure out what types of training will be required. In some cases, you might have to pay for training on a piece of equipment. You will need to know how much this training costs and if it is required on an ongoing basis.
Another thing to consider will be the amount of time it will take for training. As you already know, time is money, and every minute an employee spends on training will be time they’re not spending on their day-to-day activities.
Maintenance & Care
Maintenance and care become important factors to consider when determining the total cost of ownership. It can be challenging because it’s hard to predict what maintenance a particular item might need. Depending on the piece of equipment, you might need to find out what the most common repairs are that are needed. It might be a good idea to consider the “worst case scenario” that could happen over the life of the product.
You will also need to determine the amount of labor that will be necessary to maintain and repair the equipment. You have to make sure you know how much you will need to pay employees to maintain a particular piece of equipment.
Depending on what you are buying, transportation might be another cost to consider. How much will it cost to move the product from your vendor to your facility? Are there freight costs involved? Will you need to transport the equipment to use on other sites? These are things you’ll need to figure out before making the purchase.
Risks associated with the use of goods and services that you plan on purchasing is a critical consideration. While you always hope nothing bad will happen, there are always risks involved. When you’re determining total cost of ownership, you have to make sure you’re taking into account the potential risks involved with each purchase.The nature of the risks you need to look out for are dependent upon the type of industry you’re in and the type of equipment you’re purchasing. There are different types of risks that you may need to be aware of.
- Environmental risks
- Regulatory and compliance
- Higher-than-expected maintenance costs
This can be a challenge because you’re not always able to predict what will happen, but if you do your due diligence and become aware of the possibilities, then you can more accurately assess the risk value in the final determination of the total cost of ownership.
Determining the total cost of ownership is complex. It is even more complicated in determining how to minimize TCO. When you’re considering purchasing a product or service, keep these factors in mind. They could help you save your company a lot of money going forward.