6 TCO Considerations When Choosing a Supply Partner

Every company that sources products and has the need to identify, qualify, and engage the right supply partner should focus on the total opportunity and its associated costs, not just the lowest cost. This isn’t a new concept, though it’s one that’s often overlooked when evaluating a supply partner that fits a company’s needs. The concept we’re referring to is Total Cost of Ownership (TCO). Not only will TCO give you better overall cost in the long-run, but it’ll also give you a trusted supply partner to do business with.

Creating a plan and process with your team on day one will be the key to sustaining a successful supply partner relationship. Our main goal as procurement leaders should be to ensure our teams have a “supply partner”, not “supplier”, mindset, incentivizing them to carry out plans based on the supply partner developed. Focusing on TCO, among other aspects — supplier performance and developing partnerships — will ensure the proper development of qualified supply partners. These are key cost areas that each procurement team should be well-versed in and understand.

Challenges

  • Supply partner development costs
  • Shipping costs & time
  • Inventory costs
  • Quality costs
  • Payment terms
  • Potential cost fluctuations

The concept behind TCO has a more holistic approach, examining all costs (like the above) as they relate to the supply chain, and not just the lowest total piece or tooling costs. So, before your procurement team selects its next supply partner, implement a well though-out TCO process that ensures the below cost considerations are met and the results meet your organizational goals.

6 Total Cost of Ownership Considerations When Choosing a Supply Partner

1. Supply Partner Development Costs

Even if the supply partner can manage the entire process from raw casting to finished goods, you should be cognizant of what they can do in-house versus what they must outsource. Depending on the outsourcing needs of your potential supply partner, it’ll only add costs to the finished good the more they need outsource. Keep this in mind when sourcing all components as this early supply partner development will lower your TCO.

2. Shipping Costs & Time

China and Mexico are very favorable options for manufacturing due to lower labor costs, however they can add time to shipping and other shipping-related costs like tariffs, customs, warehousing, product damage, etc. Longer distance, more-spread-out supply chains introduce the need to safeguard against potential disruptions like transportation cost fluctuations, currency exchange rates, logistic uncertainties, and other risks, so you’ll need to account for these costs prior to making any sourcing decision.

3. Inventory Costs

Longer-distance supply chains, again, introduce issues, and with inventory costs, these often lead to securing greater inventories. Understanding this critical cost as it relates to the TCO won’t just you’re your management more confidence in the supply partner choice, but it’ll also give confidence that your team is accounting for such an important overall program factor.

4. Quality Costs

Lower quality product

  • Leads to greater inspections on your end and ultimately leading to unhappy customers and strained relationships

Increased costs due to returns or shortages

  • Leads to shut-down situations

Potential legal issues

  • Leads to added company costs and strained relationships

Safety issues

  • Leads to added costs and potential larger implications

Added travel and quality costs

  • Due to constant supply partner hand-holding and oversight

Understanding the possibility of these types of problems from the onset will lead to a better supply partner decision process that could mitigate the above quality concerns and costs.

5. Payment Terms

6. Potential Cost Fluctuations

To protect against currency fluctuation, your procurement team should choose to purchase a position on the foreign currency for the price at that point in time. Ensuring your team understands how potential cost fluctuations mitigate the risks of additional future costs will lead to a better TCO strategy for your company.

Conclusion