Chapter 5: total cost of ownership (TCO)

Components of TCO

Pre-transaction costs, transaction costs, post transaction costs

Four elements:

Quality, Service, Delivery, and Price (QSDP).

Factors beyond purchase price to be considered: (service costs and life cycle costs)

Quantity Discounts may be offered as an inducement to encourage buyers to purchase larger quantities. Cash Discounts may be offered for prompt payment of invoices. Value-added Services may also be offered such as special delivery, special packaging, preparation of promotional displays, or subassembly operations in a supplier's plant. Administrative Expenses associated with the procurement activity itself such as screening potential suppliers, negotiation, order preparation, and order transmission to name just a few. Poor Supplier Quality costs related to defective finished goods, scrap, rework, recycling or recovery of materials, must also be considered, as well as related warranty administration and repair costs.

Pre-transaction costs

identifying sources, qualifying sources, certifying sources, training/education of supplier activities prior to actual buy and sell transaction

post-transaction costs

returns from customer, replacement, repair parts and labor, maintenance, disposal of returned product

total cost of ownership (TCO)

sum of all the costs associated with every activity in the supply stream of a product Quality + Service + Delivery + Price

Transaction costs

Price negotiation, delivery confirmation, transportation, taxes/tariffs/duties, invoicing/payments, rejected goods return to supplier