This week’s Wiki-Wednesday article is about the challenges of capturing savings due to cost reduction and avoidance. One of the sections addresses Total Cost of Ownership (TCO), and the difficulties of calculating and reporting on those costs.
In the month of June, our featured publication will speak directly to TCO recognition opportunities and difficulties, specifically with regard to consumable supply categories. 'Lean TCO for Fat-Free Consumables: Minimizing Consumable Supply Total Cost of Ownership' by Tim O’Meara, president of VPCard, has had a long career as a supplier and a lean process practitioner. His book advocates putting lean practices in place – those that increase value by minimizing waste – in order to reduce costs in the supply chain.
The fact that he writes from a supplier’s perspective means that many of the cost reductions are felt first by the supplier and second (as pass through savings) by the buying organization. Although at first glance it may seem like a lot of work to save your supplier money, working towards pass through savings has an advantage – if the savings can be seen at the line item level, then it is much easier getting the rest of the organization to recognize them.
Think of this as a ‘laundering’ process. Procurement needs to increase efficiency as opportunities are uncovered. But if we try to claim that internal savings ourselves, it is called ‘soft savings’ and either discounted or not recognized at all by the rest of the organization. But if we can run that savings to our company back through the supplier, it gets counted. So maybe not all of the savings makes it all the way back to our bottom line, but getting credit for some of the savings is better than getting credit for none of it.
Watch our site starting next week for a review and other information on Lean TCO, and by all means consider buying a copy of the book to get some great ideas for how to start applying lean practices within your own supply management program.