Consider TCO to uncover hidden costs
Hidden costs can actually increase what you pay for something. The concept of Total Cost of Ownership (TCO) suggests that the purchase price of an item is actually only a small portion of the cost of owning it. For example, a school bus that costs $120,000 but gets horrible fuel mileage and requires regular repair may actually cost a school district more than a bus costing $130,000 that gets better mileage and needs fewer repairs. What is the total cost of ownership (TCO) if a district plans to operate the bus for 10 years?
School district purchasing departments and others in public procurement are often in a position to determine how equipment and other items are purchased. Purchasing should monitor the cost of ownership in order to make sure the organization is incurring the lowest possible total life cycle cost for an item.
Here are some factors in TCO:
Purchase price of the item – actual price paid
Cost of acquiring the item – the costs of identifying, finding, ordering, receiving, inventorying and paying for the item
Cost of operating the item – the costs associated with direct operations or use of the item such as fuel/energy consumption
Cost of maintaining the item – the costs associated with maintaining, repairing and servicing the item
Expected useful service life of an item – how long before it wears out or breaks
Cost of insurance or warranty
Cost of financing
Cost of disposing of the item
The cost of “time” is also a cost of ownership issue. The Purchasing Department should understand the amount of time that personnel spend identifying and finding products, or “shopping,” and look for opportunities to reduce this effort while still obtaining quality products at a reasonable price. For example, consider if a school administrative employee assigned to shop for supplies spends an hour searching for the best deal on office products. Based on employee salary alone, the effort may have added about $15-$25 to the cost of ownership for these supplies, not counting the cost of the time spent placing the order.
If the Purchasing Department makes a conscious effort to think about how something is consumed or used, it is not too hard to develop a cost-of-ownership mentality. It may be as simple as thinking about the time it takes to obtain a product. What about the cost of driving to purchase a product? You may want to consider employee time as a factor to be added to the cost of purchasing an item from an outside location. Cost of ownership is only hidden if you don’t look for it!
About the author
Steven M. Demel, CPPO, is Tacoma, Wash., school district purchasing manager and NIGP K-12 Knowledge Community Leader.