As procurement professionals, we can reduce the essence of everything we do to one single word—cost.
Just about any enterprising business can negotiate the lowest price. But does the lowest price automatically result in the best Return on Investment (ROI)? In reality, our acquisition cost, or unit pricing, only represents a small proportion of the Total Cost of Ownership (TCO). For those of us focused on the highest efficiency, there is a compelling need to break free from the narrow confines of price analysis and focus instead on achieving the lowest TCO—the sum of all costs associated with every activity of the supply chain.
TCO is a cost-efficiency strategy associated with the procurement sector of supply chain management to support decision-making that overrides the emphasis on purchase prices. Instead, TCO repositions the focus to evaluate both the direct and indirect costs of a product or service—from acquisition of materials and transportation and storage to the selling and delivery or purchased goods and services. The goal is to provide a more accurate basis for choosing among differing alternatives in a purchasing decision, thereby empowering us to make more strategically advantageous financial decisions.
Why does TCO matter?