Total Cost of Acquisition (TCA) in Supply Chain ManagementUnderstand how to lower TCA for your organization.
Total Cost of Ownership (TCO) is a concept that’s been associated with supply chain management for decades. The idea is that the cost of owning a product is broader and more encompassing than simply the initial price paid for the product. Generally speaking, TCO is comprised of two main cost categories:
- The costs associated with purchasing a product, often referred to as Total Cost of Acquisition (TCA).
- The costs associated with operating and maintaining the product through its life
Although it can be daunting to calculate and optimize supply chain costs, it is imperative that companies understand TCO, TCA, and operating costs. This allows you to have a clear picture of cash flow and the expected spend profile over time, leading to optimal capital and expense funds management and opportunities for growth. This information enables companies to properly assess potential business deals and make decisions based on sound data—without incurring any “surprise” costs along the way.
Costs included in TCA
The remainder of this article will focus on TCA. There isn't a universal list of TCA costs, but as a rule of thumb TCA costs are upfront expenses, including the initial purchase price, as well as any costs incurred to get the product to the point of use.
Some TCA costs are obvious while some are tricky to identify or may even be hidden. Below are some key costs that should be included when determining TCA. It should be noted that, while the following are some of the most common costs included in TCA, this is not an exhaustive list:
- Purchasing the Product: The purchase price of the product is typically the largest component of TCA. This cost can sometimes be reduced depending on volume discounts, standardization of the product, or negotiations.
- Purchasing Personnel Time: This cost includes the personnel time required to research and evaluate various supplier options, evaluate proposals, select the best option, negotiate a contract, place the order, and communicate with the supplier during the purchasing process. If personnel need to routinely update or expedite the purchase order, additional time should be factored into the TCA estimate for these activities.
- Logistics and Transport: Depending on the nature of the purchase, the logistics and transport activities may be straightforward or very complex. The costs may include packaging, warehousing, freight rates and shipping, and delivery fees. Import fees and insurance costs should also be included.
- Logistics Personnel Time: This cost represents the personnel time required to arrange, coordinate, track, and oversee the logistics and transport aspects of the purchase and delivery.
- Installation: Once the product arrives on site, there may be installation, testing, or commissioning costs to factor into the TCA. This should also account for any personnel time needed for upfront training.
- Margin Stacking: In general, each additional member of the supply chain adds a layer of cost or profit margin, a process referred to as “margin stacking”. These layers of cost should be accounted for, as they result in a higher TCA for a given product. In general, companies should minimize the number of suppliers in the supply chain, removing extra middlemen and reducing the potential for margin stacking, which can lead to significant cost savings.
- Accounting Personnel Time: With any purchase, there is the associated personnel time necessary for accounting activities, such as accounts payable.
- Managing Inventory: Inventory management costs should also be included in TCA estimates, as optimal inventory levels lead to lower warehousing and transportation costs. Conversely, inefficiencies within the inventory management system affect overall cash flow and lead to higher TCA.
- Contract Terms: The terms of the contract may not seem like something that would impact TCA, but these can have a large effect on cash flow. For example, terms such as invoicing frequency, payment terms, or dispute resolution, all impact cash flow and should be factored into the total cost of acquisition for a product.
- Overhead: Every TCA includes some degree of overhead costs. These costs vary significantly depending on the nature of the purchase and your specific organizational structure.
- Other: There many other costs that may creep into your TCA. For example, there may be bank charges, foreign currency considerations, taxes, or advance payments that are required for your given purchase. You may also wish to include some contingency cost. This category is often where the hard-to-identify or hidden TCA costs are located—and, unfortunately, some of these costs can be significant, so it is crucial to do your TCA homework.
Want to better understand the TCA for your supply chain? At NMG, our end-to-end supply chain management services are designed to help clients decrease TCA, lower risks, and improve operational efficiency.
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