Acquisition or purchase price is often the most visible part of procurement and because of this it is often thought that acquisition or purchase price equals to the procurement cost. However, this can easily lead astray since there are many other costs caused during procurement life-cycle, which should be taken into account when evaluating and comparing different procurement options.
With the Total Cost of Ownership thinking total costs are being perceived during procurement life cycle; at its simplest it means that as regards to procurement what costs acquired good or service causes:
- Before making procurement decision → cost of the procurement process →
- During making an acquisition → purchase / acquisition price
- During use of the acquired goods or service → costs of the usage
- At the end of the life cycle of product or service → costs of stoping the usage
The total cost of ownership thinking can be applied to all types of procurement, but especially important TCO modeling is in procurements, which are significant in terms of money and long-term procurements.
Modeling of the total cost of ownership facilitates decision making and gives an indication of the economic importance of procurement to entire company. With the TCO view, low purchase price may turn to be expensive when considering other cost factors associated with procurement. For example, when comparing different sizes of packaging and packaging methods, the cheapest is not necessarily the best option, if it involves significant storage and handling costs.
Before making procurement decision → the costs of procurement process
These refer to the costs arising from the search for suitable goods or service, possible visits to supplier facilities and factories, checking (supplier audit), assessment of suppliers and selection process.