The Supply Chain Revolution - Art Koch - Chapter 6 - Total Cost of Ownership

Chapter 6 delves into the intricacies of Total Cost of Ownership (TCO) and its role in supply chain management.

Art Koch introduces his methodology, "Art Koch’s Profit Chain," emphasizing how companies often overlook the hidden costs of ownership when making procurement decisions, which can lead to poor financial performance and inventory management.

The chapter compares the hidden costs of TCO to an iceberg, with much of the true cost lying beneath the surface. By understanding and implementing comprehensive TCO models, organizations can unlock significant cost savings and improve operational efficiency.

1. Understanding Total Cost of Ownership (TCO):
• TCO includes not just purchase price but transportation, storage, damage, shrinkage, and other indirect costs.
• Traditional procurement decisions focus only on visible costs, missing 90% of the actual cost, much like an iceberg.

2. Impact of Poor TCO Management:
• Many companies mistakenly prioritize purchase price, leading to suboptimal inventory management and financial performance.
• Inaccurate TCO calculations can be off by 25-40%, especially when failing to consider long-term costs like inventory carrying.

3. Breaking the Cycle of Antiquated Cost Models:
• The author argues that outdated cost assumptions from decades ago continue to mislead organizations.
• To truly optimize TCO, companies need to embrace models that reflect modern supply chain realities and reduce lead times.

4. Real-World Example:
• A Tier 1 automotive electronics manufacturer faced inventory and quality issues due to long lead times.
• Art’s intervention cut inventory by 60%, improved on-time deliveries from 84% to 98%, and resulted in significant cost savings.

5. Key Takeaway:
• Operational excellence in supply chain management comes from focusing on TCO, reducing inventory, and increasing inventory velocity to drive profits and customer satisfaction.

-Art Koch