SIG University Certified Sourcing Professional (CSP) program graduate Heather Frazer discusses how TCO is a great tool that will help capture the entire potential for cost savings and risk and how it is increasingly important for procurement organizations to secure reliable data.
As a procurement specialist, understanding the concept of the total cost of ownership (TCO) and how it applies to sourcing initiatives is crucial in making an informed procurement decision. To effectively utilize TCO in my role, I will apply the cost model approach to identify all costs associated with the sourced goods or services.
This approach can help me in decision-making by including ALL costs; those that can impact the price, costs that will not or cannot change by switching suppliers, and internal costs. This will help me have a holistic view of the total costs associated with the good or service rather than just focusing on the price quoted by the supplier. The price in the final quote needs to paint an accurate picture of the undertaking of all the byproduct costs that come along with it.
Currently, I support the IT area of my organization, and there are many opportunities to apply the TCO strategy. I see a chance for this in my company in areas where there is duplication in tasks. I also see opportunity in instances where an IT hardware purchase, such as a laptop, must pass through several departments, such as asset tagging, inventory, etc. Reviewing the total cost of doing this in-house versus engaging a supplier to manage these tasks may prove that the total price is lower to outsource.
Recognizing that TCO is not an exact science is essential. Having two different people performing their own cost model on the same good or service and coming to different conclusions is a perfect example. Recognizing that my cost model is somewhat subjective will enable me to look at the broader picture and aid in my success as a procurement specialist.
Additionally, the module on cost modeling was very beneficial. The cost model approach is valuable in the beginning stages of a sourcing initiative as it helps justify the efforts through the uncovered opportunities. The cost model can be used for various purposes in my role. First, I could utilize cost models to target process areas that need improvement. Once an area with high costs is identified, I can work on finding ways to optimize processes and reduce costs.
While it can be difficult to effect change in a large organization, the likelihood of adaptation is higher if management is provided with a cost model. I would consider my company an advanced procurement organization. However, we can adopt many more strategies from this program to be even more efficient and cost-effective.
Secondly, I can use the cost model to analyze supplier proposals. A cost model can provide a benchmark to compare a supplier’s proposal against similar proposals and to compare against industry standards. This will allow me to measure the competitiveness of each proposal and see if it aligns with industry standards. The cost model can also alert you to risks in the supplier’s proposal, such as material prices, exchange rates, or even inflation.
Currently, our Procurement area is more reactive in nature. This is simply due to the volume of projects that we manage. We are in the process of adding more people to the team, which will help in allowing us to become more strategic in our analysis and planning.
I look forward to utilizing several of the concepts and lessons from this course. There is so much that Procurement can offer an organization; cost savings, supply chain management, risk mitigation, supplier relationship management, and process improvement.
The Certified Sourcing Professional (CSP) Program is a 10-week course that focuses on the hard and soft skills of sourcing, including strategic sourcing and outsourcing methodologies, as well as best practices in negotiations.
Heather Frazer, Procurement Specialist, Blue Cross Blue Shield of Tennessee
Hello, I am Heather Frazer, a Procurement Specialist at BlueCross BlueShield of Tennessee. I have been with BCBST for four years. I was hired as the Contract Administrator, responsible for the contract repository and managing the corporate credit card program and travel. I moved into the purchasing side of Procurement a year ago. I have been soaking up as much information as possible on the procurement process. I support the IT side of the organization, focusing on renewals, amendments, and MSAs.
Before BCBST, I worked at Unum for 14 years as a Financial Benefits Consultant, Lead Quality Consultant, and Leave Management Specialist. My roles here involved process improvement, auditing, and claim management.
I earned my Bachelor of Science in Speech Communication from the University of Utah. I have received the Six Sigma Yellow Belt.
SIG University Certified Sourcing Professional (CSP) program graduate Heather Frazer discusses how TCO is a great tool that will help capture the entire potential for cost savings and risk and how it is increasingly important for procurement organizations to secure reliable data.
The Certified Sourcing Professional (CSP) Program is a 10-week course that focuses on the hard and soft skills of sourcing, including strategic sourcing and outsourcing methodologies, as well as best practices in negotiations.