Who is the cost expert in your business?
September 5, 2018
By Lars Wandahl Sørensen, Vice President, Industry & Offshore, Solar Danmark
It takes someone with a 360 degree view of the big picture to be in control of every aspect of your company’s costs. Did you remember to hire that type of person?
High salaries and increased competition from abroad make cost consciousness more important than ever. And Danish manufacturing companies have been wise to adopt the TCO thinking in their sourcing process. TCO – Total Cost of Ownership – represents the total ownership costs of a given product’s life cycle from purchase over operations and maintenance to disposal. Or put simply: it is a way to ensure an improved total financial situation by calculating the total price and quality ratio.
Many Danish manufacturing companies are in the process of adopting the TCO thinking and have realised that there is a lot of money to save. A lot of money. But we find that Danish companies have a potential for further optimisation of the TCO aspect and for making even more out of their money. When we in Solar give advice on TCO, we often find that the responsibility for various elements of the process has been spread onto several employees. Some focus on tied-up capital, others on services, while yet others specialise in purchase price, inventory costs, invoicing costs, etc.
And that’s quite alright. A ‘do what you do best’ strategy makes sense. However, it requires a leader with an overview of the entire TCO process, and that can’t be neglected. If one employee, e.g. the CFO or the chief accountant, has the overall, holistic responsibility to make all elements of TCO come together, it will produce synergies that are difficult to spot in each individual department. And potentially there are large amounts of money to save.
The responsibility could also be placed with a purchase manager or a category manager. There are always exceptions, but in Solar, we have seen several examples of purchase managers who don’t have a 360 degree view on an investment because it takes specialist knowledge to answer questions about operational costs, warehouse capacity, disposal costs, etc.
Typically, they are experts in optimising parts of the process related to the sourcing of products, but they may find it difficult to analyse the optimum relationship between purchase price, internal handling costs as e.g. in the goods reception, accounts department, etc. Therefore, it is necessary that someone higher in the hierarchy has an overview of TCO.
A piece of machinery can be so expensive to run that the energy consumption represents up to 95% of the total cost of ownership. Another machine can be so complicated to implement that the installation and training costs make the focus on price and energy consumption less important. In these cases, it is necessary that a manager knows how the elements interact and which elements need the most focus seen from a TCO perspective.
According to a new study from market researchers Gartner, most purchasers know that they can benefit from focusing on efficiency and improved competitive performance and not on price alone. Many companies even benefit from measuring the effect of their value chain, but according to Gartner, they often lack the tools to point out the most important parameters, which requires a management overview.
Therefore, the first thing we ask when we step into a new customer’s office is: “Who is the cost expert in your business?”