As a procurement professional, you have the difficult task of reducing spend across your organization. It’s tempting to purchase cheaper supplies, but to really slash costs, there’s a better metric than upfront cost: Total Cost of Ownership (TCO).
The total cost of ownership accounts for the full picture in manufacturing—including the cost of supplies, as well as transportation and, storage of products within the supply chain. TCO may be harder to measure than price but using TCO as your cost metric, instead of price, will result in enormous savings for your organization.
When a bargain isn’t a bargain
The reason is the lowest price supplier is often not the lowest cost supplier. For example, take these two electrical and lighting MRO suppliers: Supplier A sells a widget for $50 apiece, while Supplier B sells a higher quality widget for $100 apiece.
On first blush, it looks like Supplier A is the better deal. But, looking at the plant maintenance records, it is immediately apparent that Supplier A costs more because the poor-quality part needs replacing three times as often as the more expensive part.
Since the plant burns through the $50 part so quickly, the plant keeps three of them in stock at all times. Suddenly, the $50 part actually costs $150. Plus there are labor costs for the maintenance. And on top of that, there are downtime costs if the manufacturing lines have to stop during the repairs.
That $50 bargain part isn’t much of a bargain anymore.
The key to really lowering expenses and MRO spend is to look at MRO actions through the lens of TCO. With a TCO perspective, sometimes the more expensive parts are actually huge bargains.
Watch out for the icebergs!
IM Supply sales manager Jared Johnson likens this to an iceberg: “Some MRO suppliers like to offer low prices on contract bids, but it’s a situation where you have a large iceberg. The tip is the low upfront cost and everything under the water are things you can’t see immediately but will add huge costs to the business. The Titanic sunk when it hit the iceberg under the waterline,” he said.
With the right electrical and lighting MRO supplier, it’s easy to reduce the amount of ice below the waterline he continues: “With our clients, we do things like cost savings initiatives using different products that will last longer, inventory management, preventing downtime and our network of distributor partners.”
Choosing the right products
High-quality parts keep the manufacturing lines rolling, explains Keith Jack, IM Supply’s vice president of sales:
“When we sign on a client, we work with them to see if better quality parts would lower their costs. A high-quality part may be guaranteed to last for a year instead of six months. That reduces maintenance costs and it means the plant doesn’t have to shut down for repairs as often.”
Inventory management as a tool for lowering TCO
Carrying inventory is important to keep plant operations running, but not all inventory is critical and not all parts get used. It’s easy to end up with a storeroom packed with some combination of disorganized, surplus or outdated parts.
If parts don’t get used because you don’t need them, that’s waste. If you can’t find them when you need them, that’s waste too. There are costs to carrying inventory and if you’ve held onto a part for five years without using it, you’ve basically bought the part twice. Efficient inventory management ensures the necessary parts are always on hand when needed while at the same time drastically lowering MRO costs.
Preventing downtime is key
When it comes to raising costs, there’s nothing like factory downtime to do it. Shutting down a processing line for just an hour can easily cost tens of thousands of dollars. One important way to limit downtime is by implementing preventative maintenance. Based on the lifespan of a product combined with maintenance and purchasing records, your MRO supplier can develop a plan to replace parts at convenient times before they break, so you avoid downtime due to broken parts.
A network of distributors to service all your plants
As part of lowering the cost of ownership, you’ll need to partner with an MRO supplier that has distributors near your plant locations. When distributors are few and far between, then your plants will need to carry more inventory that ties up cash, or there will be more rushed orders, with accompanying expedited freight costs.
Price is one of many variables in the total cost equation. If you solve for the lowest price, chances are you’ll be paying a higher cost. Lowest cost may mean higher prices upfront, but you’ll be saving a lot more money. Learn more about the IM Supply difference.