The Devil is in the details \u2013One of the greatest resources to the US consumer is Consumers Union, the publishers of Consumers\u00a0Report. Consumers Report puts Total Cost of Ownership (TCO) data into the hands of the\u00a0consumer. I\u2019ve been a life long reader and recommend it highly. They are a non profit organization\u00a0that accepts no advertising \u2013 a one of a kind. They collect enormous amounts of objective\u00a0comparison data on a wide array of products. Over time, one of the many things I have learned\u00a0from the data they collect is that, in fact, it is simply a fallacy to believe low price saves money.A Lexus will likely cost substantially less over it\u2019s life than the Volvo which has a purchase price\u00a0$4000 less. Maybe it doesn\u2019t matter that an $80 pair of running shoes will last 3 times longer than\u00a0a $35 pair of running shoes. But I bet it really does matter to a lot of people who just never give it a\u00a0second thought and simply buy that \u201clow price all the time.<\/p>\n
\u201dOne of the greatest feats of marketing that I have witnessed in my lifetime is Walmart\u2019s success\u00a0at convincing the US consumer that low price is the most important thing. As millions of US\u00a0consumers bought into that and as Walmart moved their purchasing headquarters to Shanghai,\u00a0millions of US jobs went with it to China. Walmart lead this charge and survival dictated that many\u00a0other US companies do the same thing with devastating effects on the US economy and peoples\u00a0lives. What is so ironic about this is that the very people who bought into the simplicity of \u201cbuy\u00a0cheap\u201d participated in eliminating their own jobs. Why do so many people believe that buying low\u00a0price is the most important thing? If they simply stopped, looked at the economy and gave it a little\u00a0thought the consequences would be apparent. As Mark Felt said \u201cFollow the money.\u201d But the loss\u00a0of American jobs isn\u2019t the only penalty to be paid, as devastating as that penalty has been.<\/p>\n
Purchases for personal use are one thing but what about the purchase of manufacturing equipment\u00a0for your business? Is purchasing based on lowest price the smart thing to do? In fact, lots of\u00a0industry data confirms that, in general, it is not the smart thing to do. There is a great deal of\u00a0research that demonstrates how small a role purchase price plays in the total cost associated with\u00a0a manufacturing asset. So, how do you decide what to buy? Are you compelled to go for that \u201clow\u00a0low\u201d purchase price? Or, do you take the time to ask questions and really understanding if price is\u00a0the only difference, or if there are other costs that need to be considered?<\/p>\n
The concept of TCO has been around for a long time and is used widely by industrial purchasing\u00a0professions to get to the root of what an item really costs over the life of the asset. For this reason,\u00a0TCO is sometimes called life cycle cost analysis. TCO is an analysis meant to uncover all the lifetime\u00a0ownership costs that follow from owning certain kinds of assets. These costs include purchase\u00a0costs, of course, but ownership also brings costs for installing, deploying, operating, upgrading,\u00a0maintaining and disposing of the asset or the materials used by the asset. For many kinds of\u00a0acquisitions, and particularly manufacturing systems, TCO analysis finds a very large difference\u00a0between purchase price and total long term cost. Many studies and lots of data have been collected\u00a0demonstrating the importance of looking deeper than just the purchase price of an item.\u00a0One recent\u00a0industry study published by ITT found \u2013<\/p>\n
\u201cThough many plants shop for equipment based on price, industry data shows that purchase costs\u00a0represent only 10 percent of the total cost of ownership\u201d.<\/p>\n
Another example of the relevance of TCO can be found at the Edmund\u2019s.com car valuation guide.\u00a0Edmunds has developed their own proprietary method of calculating what they call the \u201cTrue\u00a0Cost to Own\u201d (TCO, clever) each vehicle. With their system you can find out if \u201csaving\u201d $1000 on\u00a0purchase price really saves you money or if that car will actually cost more to own than the car thathas a $1000 higher price tag. Like Consumer Reports, Edmund\u2019s is following the lead of industrial\u00a0purchasing pros in giving greater consideration to the costs you will pay after you buy the asset.\u00a0The Kelly Blue Book has just started doing the very same thing. It makes sense because while cheap\u00a0purchase price is easy to find the best economics can only be found with some further investigation.\u00a0Edmund\u2019s, Kelly Blue Book, Consumer Reports and others are helping to bring TCO thinking to the\u00a0mass market.So, back to the question, how do you decide what to buy and is the long term cost of ownership part\u00a0of your thinking? For many of us the hard part is knowing what questions to ask. So, here is a list of\u00a0some of the questions industrial buyers ask.<\/p>\n
Is the manufacturing process for each option the same or, is there a process technology or\u00a0efficiency advantage to one vs. the other?
\nWho developed the technology? Am I buying from them or a \u201cfast follower\u201d who may have\u00a0an incomplete or only empirical understanding?
\nHow does the cost of waste disposal\/clean up, environmental impact or pollution control
\ncompare?
\nAre there operating cost advantages \u2013 labor, energy, speed etc?
\nAre there potential employee hazards created by one of the options?
\nAre repair and spare parts costs the same?
\nAre future upgrades possible?
\nAre there any supplier experience and capability advantages?
\nDoes one option give improved operational capability ie. – higher quality, manufacturing
\nflexibility etc?
\nWhat do their customers say about them?<\/p>\n
The list of hidden cost categories above could be extended for many kinds of purchases and you\u00a0could make it shorter as well. But if you ask questions about some of these areas you may find\u00a0real differences between the options you are considering; differences that over the useful life the\u00a0purchase could save far more money than any price difference between them.<\/p>\n
Price is important, of course. And it\u2019s easy to know, which makes it useful as a decision criteria. But\u00a0next time you are gearing up to strike that hard bargain and negotiate that excellent price, keep in\u00a0mind that the assumption price is most important in choosing one option over another is, in many\u00a0cases, simply wrong and a potentially expensive error in thinking. Invest that effort uncovering\u00a0some of the hidden costs and you will likely save more money and make a wiser choice of supplier.\u00a0Companies who place great emphasis on the low price of the products they sell often have little else\u00a0to differentiate what they are selling.<\/p>\n
So, next time you\u2019re trying to decide between several options, do what the pros do and use a little\u00a0TCO thinking. Ask some of the questions above. With just a little extra effort, you should be able\u00a0to find out if that low price is really a good deal or a way for the supplier to capitalize on what you\u00a0don\u2019t know and the questions most people don\u2019t ask.<\/p>\n
As Will Rogers once said – \u201cIt\u2019s not what you pay but what it costs you that counts.\u201d<\/p>\n
Until next time \u2026 best of health and happiness<\/p>\n
Ron<\/p>\n","protected":false},"excerpt":{"rendered":"
The Devil is in the details \u2013One of the greatest resources to the US consumer is Consumers Union, the publishers of Consumers\u00a0Report. Consumers Report puts Total Cost of Ownership (TCO) data into the hands of the\u00a0consumer. I\u2019ve been a life long reader and recommend it highly. They are a non profit organization\u00a0that accepts no advertising […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[4,1],"tags":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/posts\/447"}],"collection":[{"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/comments?post=447"}],"version-history":[{"count":1,"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/posts\/447\/revisions"}],"predecessor-version":[{"id":2196,"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/posts\/447\/revisions\/2196"}],"wp:attachment":[{"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/media?parent=447"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/categories?post=447"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.ceramicprinting.com\/wp-json\/wp\/v2\/tags?post=447"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}