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Supplier Collaboration ... understanding Total Cost Of Procurement (TCOP)

When sourcing and developing long-term supplier relationships on MRO* or production items, the Total Cost Of Procurement (TCOP) checklist below can help to:

  • Identify which customized services and guarantees to request in exchange for long-term commitments;

  • Guide an inter-departmental, materials-management task team in re-thinking and re-structuring the flow of materials, paper and information to achieve three levels of productivity-efficiency, effectiveness, and structural or transformational.


When a firm buys items that are not instantly consumed there are two main categories of procurement costs - buying and holding; they, in turn, can be subdivided into the following checklist:


1. Price 7. Storage space cost

2. Shopping time 8. Financing of inventory

3. Paperwork 9. Control

4. Expediting 10. Shrinkage

5. Mistakes 11. Taxes, Insurance (Misc.)

6. Internal Handling to final consumption point

This checklist suggests that when buying something there are six separate costs that may be incurred to get physical goods to their final storage-usage point. Price (#1) is the only instantly measurable element of the 11. To get a good price requires comparative shopping and negotiating time (#2) which is expensive if purchasing department overhead is included in the hourly rate of its personnel. For every purchase, paperwork (3#) is generated. If the goods arrive at the wrong time, place or specs, then the costs of expediting and mistake-curing (#4,5) are incurred; "mistakes" should also include the downtime costs of other deprived departments. Goods are often delivered to a general receiving area instead of the final consumption-storage point; this requires internal handling and paperwork costs (#6).

Once goods get to their final storage point, buying costs stop and holding costs start. Inventory ties up space and capital (#7,8). Then it must be watched, counted, moved, etc.-housekeeping, control costs (#9). If while waiting to be used, it is damaged, permanently borrowed, or becomes obsolete, the investment must be written off "shrinkage" (#10). And finally, the overall, average investment in inventory must be insured and taxed (#11).

Using the checklist, all of the TCOP elements can be lowered if not eliminated - here is how:

Start with #1; want the best price? Offer all of your volume on a class of goods to one supplier, and ask for prices for differing lengths of commitment. If a supplier can count on predictable volume, then they can plan their business more efficiently to give you not only a volume discount but a cooperati