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Best buys > low cost

By:
  • Dale Keep
- Posted: September 20, 2017

Whether you are purchasing a deicer chemical, truck, plow or cutting edges, the purchase price is always front and center. However, the true cost associated with that item must be determined.

As I’ve said before, purchase price is the first step in determining actual cost of use or ownership. I’ve also repeatedly noted that the best product is the one that fits your needs at the lowest cost of use - not the lowest purchase price.

To determine the lowest cost of use, it’s important to adopt a process of including upfront such factors as predictable maintenance costs and life expectancy (how long will it last before it wears out?) to get to the correct number for decision-making. Life cycle bidding or best buy calculation will not only provide you with the product that best meets your needs at the lowest total cost, but also provide you the “low bid” number based on actual cost of use or life expectancy, not just purchase price. Putting this process to work for your organization to determine the best product to purchase will put dollars in your pocket.

Low purchase price is almost never the lowest cost of use when life expectancy, residual value (not present on all products) and other factors are considered.

Purchase price vs. cost of use
Purchase price is simply the amount of money paid to a supplier to acquire a product or service. It is the first step in determining the product with the lowest cost of use.

Actual total cost of use can be difficult to ascertain during the initial purchase. Total costs at the end of a product’s life will account for initial purchase price, maintenance, replacements, life expectancy due to wear, service and downtime, etc. Total cost can only be accurately determined at the end of a product’s life, when all costs in addition to purchase price have been incurred.

To compare products at the time of initial purchase, have an idea of what associated costs will need to be accounted for while comparing products:

  • Life cycle
  • Life expectancy/wear factor
  • Service and maintenance costs
  • Company history
  • Warranties

Life expectancy
Longer wear life with guaranteed reduced maintenance costs or quality of the product will lower cost of use, and that is the bottom line number that either takes money out of the budget or puts money into it. Product life expectancy and residual value, if any, can be identified through personal experience, manufacturer recommendations, testimony of use by peers, and data, to name a few. Other times buyers must rely on warranties or guarantees from suppliers to establish wear life or product performance history. In this manner, buyers can compare products based on objective information that establishes determinable costs for the life of a product.

A more expensive initial purchase may be cheaper in the long run if it lasts longer, requires less maintenance, reduces labor, or needs fewer replacements, especially if the life expectancy or time to replacement is guaranteed with something more than words. The process of life cycle purchasing is no more complicated than the examples shown below.

Although seeking lower prices is part of the equation, it shouldn’t be done without considering the factors that make costs rise. A total-cost focus assesses expenses that a purchase price-only focus ignores. Total cost includes all expenses associated with the acquisition, receipt, storage, use, life cycle, wear factor, maintenance and downtime. Improving business performance means increasing revenues and/or reducing costs. As illustrated, cost reductions are realized when products are purchased based on lowest cost of use and not the lowest purchase price.


Keep_chart

Dale Keep owns Ice & Snow Technologies, a training and consulting company based in Walla Walla, WA. Email him at dalekeep@charter.net.

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