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TCO Analysis helps set a sustainable procurement policy

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by Suchismita Dhal
1 January 2017

Procurement managers have changed their focus from traditional cost analysis to life cycle cost analysis for cost reduction. CPO and category managers are thinking of smarter ways to save as well as build a robust policy for procurement in the future. To make a reasonable procurement decision, it is important for category managers to understand the total cost of ownership (TCO) concept in MRO spares category across various industries.

Traditionally, every procurement team’s prime focus is on cost saving. They try and make small cost savings in every procurement deal. To realize the cost benefits, they need to consider the following questions. Is “price” the ultimate criteria while selecting any product or service? Do we consider the other associated cost factors before finalizing any purchase? Will it provide long-term savings? Does this type of procurement policy provide a long term and sustainable solution for the organization?

With changing times, most organizations have started acknowledging the importance of procurement in accomplishing the ultimate goal to sustain in the business. Procurement is no more limited to cost-effective sourcing and purchasing goods and services -- it plays a vital role in strategizing for a sustainable business organization. Many companies have been focusing on efficiency and cost savings, but only those who have a strategic vision could achieve success. With increasing competition in the market, only a holistic approach towards future procurement can help an organization stay competitive.

Though TCO analysis is not a new concept, organizations have started realizing its potential in bringing a significant shift in the general procurement policies. With the increased focus on cost reduction, many organizations have started emphasizing on spend management to identify prospects for long-term savings.

In any organization, a supply chain manager should understand three important questions as part of spend analysis:

How much are we spending? (Cost impact)

Where are we spending? (Suppliers/Service providers/Impact on stakeholders)

What are the long-term incentives? (Sustainable supply chain/Risk assessment)

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