Supply Chain Solutions No.7 – When reviewing price look at the End to End cost “Total Cost of Ownership”
As per sourcing Tip #6, we are all tempted only to look at the vendor price alone, but there are additional factors which must be considered to determine the “Total Cost of Ownership”
Once it has been established that the vendor can deliver value in price, service, lead-time and quality, other contributing cost factors must be considered to determine the “Total Cost of Ownership” as the following examples;
- Sampling and development costs.
- Testing Fees.
- Are the price terms FOB or Ex-Works, if Ex-Works you will need to pay the cost from the factory to distribution point or port. If the distance is far, infrastructure is challenging; cost will be high.
- Where the vendor is the only vendor in the region, there will be a higher cost for quality inspectors to travel to the vendor.
- Small quantities will incur a higher port cost at origin and destination.
- Payment terms are worth a percentage of the price depending on your local lending rates. It impacts company cash flow and adds to price value.
- If the vendor requires training and support, this is an indirect cost to the business. Where corrective actions are high, the cost of communication, travel and re-auditing will be high. These costs need to be addressed as part of the total value proposition.
- Airfreight and Seafreight cost and lead time will be different regionally, if you don’t have the shipping volume to support the region, further costs will be exacerbated.
- Different regions will incur different import tariffs at the destination.
Each sourcing project will have its positives and negatives, what is important is to weigh the full benefit, review from a “Total Cost of Ownership” perspective versus the sourcing vision to determine the full value.
ID Global Concepts are experts in supply chain management. We add value to your supply chain through consultancy or management contract to ensure the business has the best practice systems that are the right fit for your business, customer and meet your value expectations.