Total Cost of Procurement
Total Cost of Procurement
The major elements of Total Cost of Procurement include material content, minimum order requirements, physical characteristics, demand volatility, life cycle of the product, lead time and delivery method, supply source, content of material, and value of the item. In a well-managed chain of supply, these elements influence the decision making and ordering of stock. These elements should be well understood in order to understand the total cost of procurement. They have a great impact on holding stocks and also the inventory processing. Examples of these costs are occupation, warehousing labor and financial costs. For instance, small or light items require less labor and little or no additional facility costs while heavy or large items need high facility costs and labor to deal with.
The Total Cost of Procurement elements have an impact on investment risks, which has two forms, obsolete inventory and dormant inventory. Demand vitality, lead time and product life cycle have an impact on investment risk.an inventory that is not in action for a long period of time is a dormant inventory while that has reached the end of its life cycle span is an obsolete inventory.
Under costs of order processing as a component of Total costs of Procurement, it varies according thr e above elements. For example, when comparing a capital equipment manufacturer and an electronic assembly house, the two may not have a similar systems and efficiencies in their order of processing methodologies. That is, if the assembly house has equipment’s meant to deal with higher components and purchasing transactions. The order processing cost is directly related to the lead time of a good.an optimized system with the right part profile completes order processing automatically.
Vendor managed inventory costs occur when acquiring the characteristics of a product. They are very relevant when it comes to understanding Total Costs of Procurement. Designing tailored program tailored programs and understanding the services that match the customer’s expectation s require a lot of attention to detail. Customers need differ with time and this affects the flow in variations and limits the available space. Other customers have higher inventory on sites and excess capacity that require lower replenishing costs. The supply chain experts analyses a company’s processes and develop a program that shows the total cost of procurement.
A component of total costs of procurement that is overlooked is the opportunity cost. Where do you get your most value? If you take time away from your core competences, what is your lost opportunity? Focus is taken on the additional work and attention to detail so as to measure and optimize the total cost of ownership. You should focus and recognize the process as part of your competence.
In supply chain management, the Total Cost of procurement is calculated together with customer processes, the desire to be best in one’s core competence and improved analytics.
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