Take control of your Total Cost of Ownership.

Nelson Miller Group helps you identify and eliminate unnecessary costs associated with acquiring and maintaining your products so you can reduce your TCO.

Determine your Total Cost of Ownership for a more comprehensive view of product costs.

Oftentimes, cost is the only factor that organizations consider when making purchase decisions. However, the reality is that today’s global supply chains are an interconnected network of suppliers, manufacturers, distributors, and retailers that span industries and locations. This complexity makes it challenging to have visibility into all supply chain costs and to know the true cost of your supply chain. Calculating a Total Cost of Ownership (TCO) helps uncover hidden costs and equips your company to make strategic sourcing decisions to manage your supply chain costs.

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reducing TCO through effective SCM

Total Cost of Ownership explained

TCO is a method to account financially for all the costs of every activity along the supply chain, including the purchase or acquisition price, plus additional costs incurred before or after the product or service delivery, such as transportation, inventory, storage, expediting, and oversight. Many companies find it daunting to calculate and optimize supply chain costs like TCO because they’re complex and multifaceted, and they require supply chain visibility that isn’t always readily available.

The TCO involves all the payments and expenses that a company incurs to use and maintain a good or service. The broad categories of TCO are: 

  • Purchase price. Cost elements including direct material, direct labor, and overhead
  • Acquisition costs. Costs of getting the product to the point of use, such as inbound freight, sourcing, receiving, inspection, and storage
  • Usage costs. Costs of converting the purchased material into a finished product and using it throughout its life, such as scrap, final inspection, and warranties
  • End-of-life costs. Costs of terminating a product, such as disposal and excess inventory

 

At NMG, our supply chain management services are designed to help clients decrease their TCO and improve operational efficiency. We use our experience and know-how to create custom supply chain solutions that are tailored to our clients’ specific needs—leading to lower risks, reduced TCO, and improved customer relationships.

There are many nuances to consider when looking at TCO. NMG will help you factor in all of these elements and more:

Purchasing the product

The purchase price includes the supplier’s manufacturing costs, overhead, and profit. NMG helps reduce your purchase price in big ways, including cost-optimized engineering design and manufacturing support.

Margin stacking

In general, each member of the supply chain adds a layer of cost or profit margin, a process referred to as “margin stacking”. When you work with NMG, we streamline your AVL and eliminate the margin stacking created by unnecessary middlemen. With NMG, you gain the benefit of one centralized point of contact while also experiencing significant cost savings.

Transportation and logistics

Depending on the nature of the purchase, your transportation and logistics activities might be straightforward—or exceedingly complex. These supply chain costs may include packaging, warehousing, freight rates and shipping, and delivery fees. Here are some important factors to consider related to transportation and logistics:

  • Shipping costs. Shipping costs and complexity increase with distance. Ocean and air transport involve packaging, transfer, inspection, customs charges (including charges for examining freight), import duties, and storage costs. Companies often use agents or brokers (at the origin and destination) to help them with these tasks, which impacts the overall cost of the supply chain.

  • Shipping time. Travel time for a container vessel, say from Asia to the US, can be extremely lengthy, especially when you factor in customs clearance and inland shipping. This impacts TCO because inventory can’t be accessed during transport time, creating the need for manufacturers to carry buffer inventory to cover customer demand. Shipping delays can also result in expedited freight and higher charges required to meet customers’ delivery dates.

  • Trade regulation costs. Trade incentives and restrictions are offered by the buying and selling countries, including those established through trade agreements (FTAs) between countries or groups of countries. There are also documentation requirements (and potential penalties for errors) for customs clearance in the importing country.

  • Other logistics factors. In addition to the cost of transport and shipping time, the storage available—both internationally and domestically—will impact your Total Cost of Ownership. Other factors can be the levels of flexibility (and additional fees) at the supplier to implement product modifications and enhancements and at the logistics service providers (LSPs) for changing production and delivery plans. Seasonal supply fluctuations and adverse weather conditions may also affect the availability and cost of storage space and transport.

NMG understands the local markets, transportation systems, and regulations needed to make your logistics not just painless but also cost-contained. For globally sourced freight shipping, we handle customs clearance and export documents for a hassle-free entry of products into the US. NMG tackles the intricacies of global logistics for you, allowing you to eliminate extra agents and unnecessary complexity from your supply chain—lowering your TCO in the process.

Quality assurance

Ensuring the quality of your manufactured products is a non-negotiable for OEMs—at least those who want to stay in business. For companies that source goods or components overseas, quality inspections may even be required for incoming components. These costs should also be considered as part of your Total Cost of Ownership. Unforeseen or uncontrolled quality problems from a supplier may lead to:

  • Additional inspection requirements
  • Expensive product returns and shortages
  • Legal liability
  • Inability of supplier to meet certification, safety, or other regulatory issues

Efforts to anticipate, control, and resolve quality issues usually result in increased travel time and cost for suppliers, but not when you partner with NMG. Quality is a built-in part of our process at every step, ensuring you avoid unnecessary defects and quality issues that can affect TCO and customer confidence.

Legal and financial concerns

There are a number of legal and financial factors that should be considered to calculate a comprehensive TCO and protect your business:

  • Intellectual property. Protecting intellectual property (IP) rights is a necessary step in both the United States and foreign markets. For small and medium enterprises (SMEs) in particular, protecting IP rights in the US is easier than in most overseas jurisdictions. IP costs should be considered in the total cost of ownership.
  • Currency fluctuation. When purchasing components or products overseas, the history of currency fluctuation must be taken into consideration. The price may be quoted for an annual contract, but during the year the foreign currency value versus the US Dollar may have changed, changing the price in US Dollars.
  • Contract terms. The terms of the contract may not seem like items that would impact TCO, but these can have a large effect. For example, terms such as invoicing frequency, payment terms, or dispute resolution all impact cash flow and should be factored into the TCO for a product.
  • Financial costs. Payment may require financing and other costs such as bank fees, taxes, insurance premiums, and administrative fees.

NMG empowers you with strategic advice and customized financial terms that are beneficial to your cash flow. By integrating these considerations, we ensure you’re not only legally safeguarded but also financially optimized, contributing to a reduced TCO and enhanced overall business resilience.

Risk management

There are many potential risks associated with any supply chain—disruptions, lead time, volatility of demand, natural disasters, black swan events, and countless others. It’s essential to build in contingency plans and a risk management program to deal with the unplanned and unforeseen. A risk management plan increases your TCO, but it also allows you to recover more quickly when the unexpected happens.

NMG goes beyond conventional supply chain management by intricately integrating tailored risk management solutions into our services, ensuring our clients have robust contingency plans in place. This proactive approach not only mitigates potential risks, but also enhances the overall resilience of your supply chain, enabling quicker recovery and minimizing potential impacts on TCO.

Installation

Once the product arrives on site, there may be installation, testing, or commissioning costs to factor into the Total Cost of Ownership. NMG can help identify these ahead of time and factor them into your budget to avoid any cost surprises.

Personnel and labor costs

With any purchase, there are numerous personnel involved whose time needs to be factored into your TCO:

  • Purchasing personnel. The 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 TCO estimate for these activities.
  • Logistics personnel. The time required to arrange, coordinate, track, and oversee the logistics and transport aspects of the purchase and delivery.
  • Accounting personnel. The time necessary for accounting activities, such as accounts payable.
  • Training/support. The time required for training on the product, as well as troubleshooting costs of maintenance. Sometimes a purchase may require additional specialized labor and training depending on the associated software, technology, and storage needs.

To control and manage supply chain costs, it can be more reliable to outsource to the right logistics company rather than perform the operations in-house. NMG is here to help—we reduce the workload on your team and streamline communications so less of your valuable time is taken up with the administrative work associated with acquiring your product.

Warranties

In many instances, OEMs will choose to offer a warranty to customers in which they commit to repair or replace their product within a specified period if it proves faulty or fails to meet predefined performance standards. Offering a warranty can initially increase TCO due to potential costs associated with honoring warranty claims. However, this upfront cost is often viewed as an investment in customer satisfaction and loyalty. While the direct expenses of fulfilling warranty obligations can temporarily raise TCO, the long-term benefits may outweigh these costs. A well-managed warranty program can enhance customer trust, strengthen brand reputation, and foster repeat business. Satisfied customers are more likely to recommend the brand, leading to increased sales and overall profitability, ultimately contributing positively to the manufacturer's TCO in the broader business context.

Overhead

Every TCO will include some degree of overhead costs. These costs vary significantly depending on the nature of the purchase and your specific organizational structure. Many companies lack the capital to invest in large-scale logistics, including transportation and warehouse operations, demand planning and procurement automation software, and the space required to house equipment and operators. Others need to eliminate the cost of paying for a whole warehouse when they only need part of the space. NMG can do everything from coordinating with your existing 3PL partners or warehouses, to securely storing and shipping your products exactly when they need to be there. We help you find a solution that works for your business needs and your budget.

Inventory management

Effective inventory management is critical in managing Total Cost of Ownership throughout a product’s life cycle. Holding some inventory is helpful in mitigating revenue disruption from down lines or stock shortages. However, excess inventory ties up capital and resources that could be allocated more efficiently elsewhere. Additionally, it may lead to increased markdowns or liquidation efforts to clear the surplus, impacting profit margins.

NMG provides proactive inventory management through just-in-case (JIC) inventory, and just-in-time (JIT) inventory. We employ both inventory strategies simultaneously, by maintaining JIC inventory for you—taking on some of your risk and allowing you to maintain a safety stock. At the same time, you also get JIT delivery, so your product is in the right place at the right time, even when unexpected events disrupt your supply chain. We offer superior terms and warehousing services that free your working capital held in inventory and reduce your upfront investments and holding costs. Utilizing both strategies simultaneously lowers your financial risk and ensures your inventory is always readily available.

Inevitably, every product reaches the end of its life cycle. At this stage, excess inventory can significantly impact TCO. As products approach the end of life, maintaining excess inventory incurs storage, handling, and management costs. These costs include warehouse space, security, and potential obsolescence risks. NMG’s JIC and JIT inventory solutions carry through to end-of-life planning to ensure you’re not stuck dealing with loads of excess inventory

Disposal

In some cases, it’s necessary to consider what is involved in dismantling or recycling products or materials, as well as what’s necessary to comply with the legal and environmental requirements in terms of final disposal of waste. It is not always as simple as throwing it away—sometimes complex and expensive processes must be carried out.

Why NMG?

Strategic outsourcing can eliminate numerous actors along the supply chain and eliminate over-complication that leads to margin stacking. It’s critical that you understand all the components that make up your supply chain and their impact on your costs and risk. An outsourcing partner like NMG can help you examine TCO for your unique supply chain and identify opportunities to lower risk and eliminate hidden costs.

The best place to start is to analyze your cost drivers. We believe transparency and trust are essential to a successful partnership, and we’ll always be honest with you about where we feel we can make the most impact. This often includes implementing second- and multi-sourcing strategies to eliminate margin stacking and reliance on a single supplier, monitoring quality standards through global supplier relationships and in-country support, inventory management, warehousing, and/or engineering design. A custom-designed solution will ensure your organization benefits from a truly optimized supply chain.

NMG’s end-to-end supply chain services help you better understand and control your Total Cost of Ownership and other operating costs. This allows you to have a clear picture of cash flow and expected spend profile over time, leading to optimal capital and expense funds management and opportunities for growth. When you have NMG on your side, your products become more profitable and you can better assess potential business deals, making decisions based on sound data without incurring any “surprise” costs along the way.

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