Feature: Total acquisition cost of ownership explained

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Prof Douglas Boateng

Strategic Sourcing and Industrialisation insights with Prof Douglas Boateng

Why understanding the total cost of a product can help to support long-term socio-economic development on the continent

As with most acquisitions in the developing world, unit price is often the first consideration of African buyers.

When comparing different, yet similar, products a consumer will more often than not choose to purchase the product with the lowest unit price. This is despite the fact that when other costs of the acquisition are factored in, the product with a higher initial unit price might prove to be the most cost-effective option.

Total Acquisition Cost of Ownership (TACO) is an analysis that allows organisations to determine the real or total costs involved in making a purchase. Owning an asset comes with a variety of costs. These costs are not just related to direct product price, but also include acquisition, delivery, installation, set-up, operating, storage, handling, upgrade and disposal costs to name but a few.

TACO factors in the complete lifecycle of a product and evaluates all acquisition, transportation, storage, operation, and personnel costs – not just the direct unit costs.

For example, when purchasing a car, some of the key TACO elements that should be critically analysed include: depreciation costs, fuel costs, insurance, storage, financing, repairs, scrap fees, toll fees, fees and taxes, maintenance costs, road taxes, environmental taxes, replacement value, and downtime costs.

Understanding the total costs associated with a purchase should therefore be at the forefront of any organisational governmental or consumer sourcing strategy.

When procuring network printers, an organisation may compare a range of brands and options. This comparison of the unit price of printers with the same specification might lead to the choice of the one with the lowest unit price. However, when factoring in other costs of the acquisition, especially lifecycle costs such as consumables and product support, another device, with a higher initial unit price might prove to be the most cost-effective for the organisation.

And questions around what is being bought, who it is being bought from, where the item is coming from, why it is being bought at this particular time, who the item is for, what the short-term acquisition implications are, what the long-term implications are for the region and society, and so forth need to be considered.

The successful application of TACO principles can have a direct bearing on the long-term development of organisations, industry verticals, shareholder wealth, organisational bottom-line performance as well as provides a platform for long-term job creation and socio-economic development.

TACO analysis started off as a management accounting technique to help organisations understand the cost drivers associated with a product. Today, the concept has been expanded to include among others, acquisitive impact on industry and society as a whole.

It assists in uncovering all of the lifetime costs associated with owning an asset, be it tangible or intangible. It is a financial estimate aimed at assisting procurers to quantifiably determine the direct costs associated with a product, indirect cost associated with a product, opportunity costs associated with a product, and, increasingly the socio-economic implications associated with a product.

As an analytical tool, it can also assist businesses and governmental institutions and departments with budgeting and planning, asset life cycle management, prioritising capital acquisition proposals, vendor selection, commoditisation, market analysis, profiling, make vs. buy decisions, risk management, industrial transformation and management, sourcing strategy, and supply base rationalisation.

Some of the sectors that have shown demonstrable ongoing benefits from the adoption of TACO analysis in their sourcing practices include agriculture, food and beverages, mining, oil and chemicals, aviation, logistics, pharmaceutical and healthcare, financial services, ICT, and public sectors in especially OECD countries.

Other sectors that could benefit from this approach in include: tourism, resource exploration, nutraceuticals, cosmeceuticals, agroceuticals, fine chemicals, education and construction.

Viewing strategic sourcing through the TACO lens offers numerous benefits.

Firstly, cost-price benefits can be achieved through TACO. These include lower unit prices, volume discounts and payment term discounts together with supply chain savings through reduced cost of capital, warehousing and shipping costs.

Secondly, TACO can reduce lifecycle costs in maintenance, operations and disposition.

Thirdly, since TACO questions demand, optimises consumption and substitution and offers a means to review and alter product mix within an organisation it can assist management with requirements optimisation. It also aids forecasting requirements, simplifies specifications for products and encourages organisations to seek alternatives where desirable.

Finally, TACO can assist with efficiency optimisation.

Ultimately, these benefits can contribute significantly to job creation, local empowerment, SMME development, increased supplier development and overall industrialisation in Africa.

As already mentioned, today, total acquisition cost of ownership is evaluated well beyond organisational boundaries to ascertain its impact on industry verticals and society as a whole. For example, while it may seem more cost effective to import a cheaper product, acquiring a slightly more expensive product from a local supplier may have greater sectorial industrialisation and socio-economic benefits in the long term.

For example, consider a product such as canned tomatoes. If you were to compare three options when it came to purchasing canned tomatoes, you may select the cheapest option without taking into consideration where that option originally comes from. In this case price may be the greatest determinant of your procurement choice.

However, if you consider the TACO you may decide to pay slightly more for the locally made and sourced option in the hopes that this slightly more expensive purchase will not only lead to lower prices in the medium- to long-term, but could also boost productivity and accelerate industrialisation and long-term job creation on the continent.

Yet, based on extensive seven-year purposive fieldwork in selected countries, the probability of the African consumer overlooking price and strategically supporting the relatively more expensive locally produced and on par quality products is less than 33%.

In an attempt to realise the societal potential of total acquisition cost of ownership, it is important that TACO analyses be completed in conjunction with a strong Supplier Selection Relationship Development and Management (SSRDM) strategy.

Supplier Selection Relationship Development and Management (SSRDM) is a comprehensive approach to selecting, developing and managing the affairs as well as interactions with organisations that supply tangible and intangible goods.

SSRDM aims to include and nurture specific supplier(s) in multiple phases of the value creation process to foster medium- to long-term ‘win-win’ competitiveness, channel agility, sustained performance and innovation.

The strategy assists in critically analysing, collaboratively and jointly fine-tuning business practices, process methods, policies, governance, people development and increasing value-driven corporate social responsibility initiatives.

As a means of improving the total acquisition cost of ownership (TACO), SSRDM focuses on improving overall value chain performance that suppliers can provide to an organisation by ensuring the relationship is about ‘win-win’ bottom-line performance, development and management for sustained long-term mutual benefit.

Unfortunately, at present, many public and private sector C-suite executives and policy makers continue to adopt a “mere suppliership” modus operandi when it comes to the acquisition and supply of tangible and intangible goods and services.

As a result, they are more prone to opt for short-term cost and profit gains as opposed to medium- to long-term win-win collaborative value adding, job and wealth creating partnerships – thus limiting opportunities for the implementation of socio-economic and developmental driven procurement strategies.

In addition, these same decision makers often adopt an ‘in and out mentality,’ which supports getting as much as possible out of a situation as quickly as possible, and then moving on to the next opportunity. Not only does this lead to the development of adversarial interactions, but it also prevents any opportunities for the development of long-term, mutually beneficial organisational competitiveness, local and regional wide industrialisation and economic development.

It is an accepted fact globally that mere supplierships and long-term de-industrialisation are inextricably linked. The consequences of which are, among other things, service delivery quality challenges and the spectacular collapse of numerous local and regional wide companies and industries; culminating in widespread unemployment and joblessness in many countries.

Consequently, the adoption of these short-term driven practices has had a significant negative and often devastating impact on job creation and poverty reduction initiatives in various developing economies.

In short, by gaining a clear understanding of all of the costs associated with an acquisition, public and private sector organisations alike will be able to make sourcing decisions that not only benefit their bottom lines, but also contribute to the overall socio-economic development, growth and support of African suppliers, industries and supply chains.

Douglas Boateng, Africa’s first ever appointed Professor Extraordinaire for supply and value chain management (SBL UNISA), is an International Professional certified Chartered Director and an adjunct academic. Independently recognised as one of the vertical specific global strategic thinkers on industrialization, supply and value chain governance and development, he continues to play leading academic and industrial roles in sectorial reforms both in Africa, and around the world.

He has received independent recognitions and numerous lifetime achievement awards for his extraordinary contribution to the academic and industrial advancement of supply chain management from various international organisations including the Chartered Institute of Procurement and Supply, the Commonwealth Business Council and American multi-national Hewlett Packard (HP).  For more information visit www.douglasboateng.com and www.panavest.com

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