Operations Payoff

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Beyond Part Price: The Big Picture and Total Cost of Ownership

Depending on how strong a company’s CFO is and how much pressure there is to reach financial marks, most companies are heavily purchase-price oriented.  Taking a total cost of ownership (TCO) perspective is crucial to achieving a value-adding relationship with suppliers. In many cases, the place you save the most money is not part cost.

The concept of TCO goes back at least to the mid-80s, so why aren’t more companies taking a TCO perspective, especially when they are considering moving production offshore or using overseas suppliers? If you look solely at part price, buying from China made a lot of sense 10 years ago. Now, many companies are taking a TCO view and choosing to move production back to the US (and even Chinese companies are setting up factories in the southeastern US).

An interesting example is a Toyota factory in Kentucky that requires nearly all suppliers to be within 150 miles of the plant. They may be able to find a lower part price from a far-away supplier, but by having suppliers nearby they save on transportation, they get the product faster and can get just in time deliveries. This saves money overall, even if the part price is higher.

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