6 ways to kill business with Procurement. Part 2: narrow-framed TCO

It is procurement who claim to be the champions of the approach for always assessing the Total Cost of Ownership. But if you forgot it by now – procurement professionals are still only people. narrow framingIt is hard enough to navigate through natural biases, let alone the traps that the salespeople set to buying colleagues. I have provided one example in the picture. You will have seen similar situations with three sizes of pop-corns or coffee servings at the shops. However, falling into such “small” traps would not be enough to kill a business, right? Let’s see what would kill a business.

A company ran a tender. They were buying a check-weigher for a meat processing plant. Check-weigher is a machine that checks if the weight of the packed product is accurate. The requirement from the technical department was 98% accuracy – due to due to regulatory requirements. There were two suppliers left in the process [1]: table2

  • Supplier A submitted the required 98% weighing accuracy machine for £1m.
  • Supplier B offered a 99% weighing accuracy machine, priced at £2m.

The buyer also compared: critical spare parts (prices, schedule of changing), engineer callout costs and frequencies, secured downtime warranties and all other possible cost drivers. Overall Supplier A was cheaper over the investment lifecycle time by £1.2 million. Framing the situation like this (project-width framing) makes the decision very simple and obvious.

However, there is a different way to look at it. In this case, the buyer went to talk to business analysts and the commercial department. They worked out the numbers: the weighing accuracy difference would pay for itself in approximately three months of full capacity running [2]. To view it from a different perspective: had the buyer not checked this detail, the company could have potentially lost up to £18 million of revenue. To recap: the company could have lost eighteen million pounds. Do you think this could be a significant enough number?

Saying that you analyse the total cost of ownership is not enough. Do you frame your TCO from a business perspective? I would welcome a discussion on different framing ways for various situations. Are you wondering how stationary buying might be framed differently? Are you working on something and would welcome a different approach? Please comment and share – I will share my views and I am sure the colleagues from the network will add to it.

If you missed it, the first way to kill a business with procurement (by buying not needed items) is here.

[1] The numbers provided in the example are fictional and for illustration purposes only.

[2] The supplier A was given a chance to review their offer and technical specifications.

6 ways to kill business with Procurement. Part 2: narrow-framed TCO

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