The complexities of managing supply chains goes way beyond the upfront costs of your products or services. Understanding the Total Cost of Ownership (TCO) of the acquisition, use, and lifecycle of each product or service can help you consider both direct and indirect expenses and provide a better view of your true costs in your supply chain. Let’s explore how understanding TCO can positively impact your supply chain management, what you can do to optimize costs, and better manage your supply chains.
What is Total Cost of Ownership (TCO)?
Total Cost of Ownership is the full cost of a product or service including direct costs like procurement to indirect costs like usage or maintenance. There are many costs for a product that may get overlooked in the initial purchase that can cause additional spend down the line. If you don’t have a good understanding of the full costs associated with a product you could be spending more than you planned.
How does TCO Affect Supply Chain Management?
Looking beyond the short-term costs, you can improve your supply chain efficiency, reduce the risk of unplanned costs, and improve your overall profitability in the long term by evaluating several factors:
- Suppliers: Using the right suppliers is a critical component to minimizing TCO. Looking at quality, delivery, and warranty costs should be considered when purchasing products or services, as these costs can significantly grow as time goes on. You can reduce future maintenance issues and costs if you choose suppliers with higher quality products that might be more expensive than a lower priced product from another supplier.
- Inventory Management: Effectively managing inventory is another huge factor in reducing TCO. Using a Vendor Managed Inventory (VMI) or technology-based inventory management system ensures you have the right stock levels. This helps avoid over or under-stocking items that can cause disruption to your operations and higher costs for rush orders if you run out or additional storage if you overstock.
- Environmental Efficiencies: Managing your supply chain impact on the environment can also provide TCO savings in the longer term. Using energy-efficient equipment, eco-friendly materials, and recycling used products can be more expensive in the short term, but will reduce operational costs, improve compliance, and provide cost savings in the long run.
How to Leverage TCO in your Supply Chain
Using TCO to make supply chain decisions can lead to significant cost savings. Implementing tools that track and forecast costs provides insight into your supply chain and where you can save. Partnering with strong suppliers who help you manage TCO, improve quality, ensure accurate inventory, and improve operations is key to managing costs. Viewing costs from an overall lifecycle perspective versus just the initial product expense will give you the long-term data you need to make the best decisions for your supply chain.
Supply chain managers have to look at direct and indirect costs when making investment decisions for products and services. Looking at the total cost of ownership can help ensure long-term goals are not overlooked by short-term purchasing decisions. Gexpro Services specializes in supply chain management and inventory solutions to help companies maximize their total cost of ownership. Talk to our team today about how we can help manage your supply chain by optimizing your total cost of ownership.