Purchase at Lowest Total Cost of Ownership

Supply managers incur various costs when purchasing goods and services and they should take every opportunity to reduce or avoid these costs whenever possible. In the past, purchasers were only interested in the price per unit when making purchasing decisions. Often overlooked were other costs incurred but not considered. Total cost of ownership (TCO) considers these other costs that are beyond the cost per unit of an item being purchased. These costs are often significant and if left unchecked can cause unnecessary additional costs to the company. 

Landed cost (unit price, transportation, custom duties) 

After all relevant costs are accounted for, it is entirely possible that a supplier who was considered a frontrunner is no longer in that position. Since total cost of ownership can change over time, it is necessary to extend TCO analysis into the future. Table 10.5 reveals an example of TCO analysis for purchasing 500 laptop computers. 

Although the example is simplistic, it does represent how TCO is calculated. It identifies and includes all of the relevant costs from the present days initial cash outflow, and since IT equipment typically has a useful life of about 3 years, the analysis extends into the future. This exercise would be repeated for each supplier under consideration. The supplier with the lowest TCO is the most logical choice if cost were the only decision criteria. Of course, other criteria should be included in the decision-making process, which have been introduced throughout this chapter. 

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