TOTAL COST OF OWNERSHIP

As we already saw in the previous video, there is vital difference between the purchase price of an item and its total cost of ownership.

Total cost of ownership includes not just the price of items being purchased, but also:

1. Various transaction costs, such as taxes, foreign exchange and contracting costs.

2. Finance costs (if capital has to be borrowed to pay for the purchase, say)

3. Acquisition costs: costs of delivery, installation and commissioning

4. Operation costs, such as energy, spares, consumables, maintenance and repair

5. Cost of storage and other handling, assembling or finishing required

6. Cost of quality (inspection, re-work or rejection, lost sales, compensation of customers etc)

7. End of life costs, such as decommission, removal and disposal (minus some ‘negative cost’ if the asset has sufficient residual value for re-sale)

Some of these costs may be included in the price quoted by a supplier and a purchaser will need to bear this in mind when comparing two questions, Does a lower price reflect competitive pricing or a lesser total package of benefits?

More generally: there is a trade-off between the purchase price and the total package of benefits.
‘It is an obvious fact, yet a commonly ignored one, that a low price may lead to a high total acquisition cost’ (bally et ol).
But A lower price may also reflect poorer quality, and this will not necessarily be better value for money:

‘Best value’ may therefore be defined as the lowest life cost which meets the purchaser’s complex package of requirements (for quality, service, ongoing partnership with the supplier and so on)
And it is this total cost/benefit package that must be defined and negotiated with suppliers, for complex procurements.

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