Total Cost Sourcing

Purchasing professionals are under greater pressure today than ever before to cut costs, and to prove the savings they achieve. But accurately measuring savings beyond a few obvious costs such as: price, quantity, freight, inventory and some energy savings can be difficult. Add to this the ability for some suppliers to impact hundreds of cost drivers throughout an organization’s operations, and the need for building the means to understand and measure these costs to make sound financial decisions becomes critical. The first step is to understand how a supplier can impact your total operating profit.

There are four main categories where suppliers can impact a customers total operating profit:

Revenues: how a supplier can help minimize downtime, increase production rates, reduce rejection rates or reduce the time to market for new construction / products / production lines.

Expenditures: price and quantities are obvious costs, but many suppliers can impact other expenditures including: energy costs, freight, utilities, disposal costs, raw materials/spare parts provided by other suppliers, regulator fines, insurance, legal and service fees.


Processes: One of the largest expenses that a customer is faced with is personnel or payroll cost. Suppliers offer many means for customers to reduce the personnel costs required to perform a task by reducing the time to perform it or the number of times the task needs to be performed.

Assets: Assets are not costs, but the financial investment from owning these assets produces what is known as a possession cost. Procession cost is the cost for owning any type of physical property. This could include inventory, equipment or facility requirements.

Without the ability to measure total cost and be able to make decisions on how both the supplier (due to the services they provide) and the products purchased impact the total operating costs, a company could be paying far more in operating costs as it saves on price paid. Not only can this have a negative impact on profits, it can also create "bad will" with internal users/customers.

Purchasing on a total cost basis requires a change in how the sourcing organization approaches “cost” and their internal customers. They have to have a standard means to measure savings across suppliers. If they rely on the suppliers, it can result in inaccurate estimates and hugely differing ways to measure total cost (resulting in no way to truly compare the savings. It would be like each supplier offering you savings based on different currencies, but you do not know the exchange rates. You really do not know what you are saving).

But for those companies that understand how to measure and compare suppliers on a total cost basis, it offers a true competitive advantage because suppliers impact every functional area within an organization. They have the ability to improve effectiveness, efficiency, and quality. All of which can have a dramatic impact on revenues and operating costs/profits. It also makes purchasing a more strategic part of the organization.

For more information about our Total Cost Sourcing Training and Consulting Services, click here

For more information about our Total Cost Sourcing Measuring and Tracking Software, click here

At Strategic Business Solutions (SBS) – we provide the tools, knowledge and training to help companies measure and compare suppliers on a total cost basis, and to build collaborative relationships that can make you more profitable. Contact us so we can show you how we can help.

"Tim has helped us launch new alliances and enhance the results of existing alliances. His insights on how to make alliances work for both companies (customer and supplier) have been invaluable."

Gail DeVeau, Director Supply Chain
We Energies

Tim Underhill, President of Strategic Business Solutions, worked with Alcoa and some of their suppliers to reduce total cost. Alcoa’s response to the software and results:

"Great work! We love it and want more of it from our suppliers."

Adrian Sandoval
ALCOA Global Sourcing Manager (now retired)