Eskom Procurement Book 2015

TOTAL COST OF OWNERSHIP (TCO)

Two other types of measurement systems include categorical systems and weighted-point systems. Categorical systems involve subjective check-offs for various items. A user assigns ratings such as excellent, good, fair and poor to selected performance categories. Categorical measurement is the lowest level of measurement in terms of sophistication. Weighted-point systems, which are widely used in supplier performance scorecards, use scales with defined values. This approach weighs and quantifies scores across different performance categories. Currently, the most common system used when making sourcing decisions is a weighted-point approach. Neither categorical nor weighted-point systems consider total cost, although a total cost metric instead of a price measure could be included in a weighted-point system. Cost-based systems offer advantages and disadvantages and systems can be extremely challenging to develop and use. As they relate to supply management, total cost models are applied within three major areas: total landed cost models; supplier performance cost models; and life-cycle cost models. While at first glance these may appear as three independent types of models, they can have overlapping cost categories. A life-cycle cost model for capital equipment, for example, should include the purchase price along with any charges incurred to transport and install the equipment. Transportation costs will usually appear in total landed cost models. The three models are discussed in more detail below and a later section identifies the kinds of cost elements or categories that may populate these models. A total landed cost model is ideal when evaluating suppliers prior to making purchase decisions. Landed cost is the sum of all costs associated with obtaining a product, including acquisition planning; unit price; inbound cost of freight, duty and taxes; inspection; and material handling for storage and retrieval [6]. Of course, each of these cost categories will contain numerous sub-categories. On seeing the word ‘landed’ it is reasonably safe to assume a reference to total cost estimates or calculations that involve international shipments. Total landed costs models are also used, however, when evaluating domestic shipments. In this case some of the cost elements (such as tariffs) will not have costs allocated to that element. Every company that is serious about controlling costs should develop total landed cost models. Best practice companies require their commodity teams or buyers to attach spreadsheets that show the total landed cost whenever they propose a supply strategy or make a supplier selection decision. Few supply managers would question the importance of these models when making foreign sourcing decisions. If a company were to develop only one type of total cost model in the international arena, this should be it. Various costs incurred when sourcing internationally are not present when sourcing domestically. For example: a company is evaluating three suppliers, one in Germany, one in China, and one in the USA. Considering price alone, the Chinese supplier may be an obvious choice, but a detailed total

6.3.1 TOTAL LANDED COST MODELS

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