Friday, December 20, 2013

Total Cost of Ownership

Never talk to a leasing professional about buying a new car. 

A long discussion will commence about acquisition cost, discounts, anticipated mileage, maintenance costs, length of ownership, residual values, brand perception and market appetite and you'll feel more like you’re buying a small aircraft.

In reality, these factors are relevant to purchases of any kind, and the fact that the leasing industry calculates their rates based on these very considerations means that any procurement professional should at least be aware of them and consider taking account of them in their purchasing decisions. 

Purchases of large plant and machinery are perhaps a more familiar area for such considerations, but there are a wide range of items with a potential future resale value that should at least be factored in to total cost of ownership calculations. For instance, the 5 year resale value of IT equipment is generally low as a percentage of original cost, but Apple equipment bucks this trend and retains a greater proportion of its original purchase price (and arguably justifying this higher initial price).

In addition, procurement managers now have to consider the sustainability of their purchasing decisions. Instead of running equipment until end of life then scrapping it, more sustainable alternatives have to be found. These may include renting or leasing instead of buying (though be aware the profit of these organisations is associated with managing the above factors), sale of owned assets prior to their end of life, or even internal redeployment. 

Many large companies use asset management software for internal asset re-deployment; as easy as you think it would be to let someone else in your organisation know that you have surplus assets, it takes a managed system to handle this effectively and fully take advantage of the potential savings.

So what is the best way to go about calculating these factors for yourself and evaluating a true cost of ownership? Much of the information may already be within your company (records of previous purchase costs, maintenance, annual usage etc) while the potential resale value will take a little more work. One source is auction companies that publish their sales prices for a period of time, in addition  online forums are a great place to find out about brand perception of certain manufacturers. 

Above all, make sure the product you purchase matches your company’s requirements; sometimes you just a car with the biggest boot!

Photo Credit: The Library of Virginia via Compfight cc