What Does The Buyer Want, Anyway? Part III
Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant
Editor’s Note: This is Part III of a three part installment on how sellers can better identify and serve the buyer’s interests. Part I explored business from the buyer’s viewpoint, Part II examines specified how to use TCO to sell ‘Best Value’, and Part III provides specific tools for managing TCO.
This worksheet is a simplified version for the sake of clarity. It is a tool for computing an estimate of the Total Cost of Ownership of a purchase as well as evaluating performance with objective measures.
Your worksheet should be expanded to reflect the buyer’s specific concerns. The metrics should be as simple, objective and meaningful as possible. Avoid messy formulas as they are dismissed as hocus-pocus. Here are just a few examples of what you can add.
| Quality | Service | Delivery |
| Down Time | Training | Stock outs/Back Orders |
| Maintenance & Repair | Tech support | Inventory turns |
| Shelf Life | E-commerce capability | Customs/duty |
| Warranty Period | R & D | Obsolescence |
Our model represents only the impact on Price caused by of shortcomings in Quality, Service and Delivery. For simplicity, we choose to surcharge the Price as indicated, and then add the surcharges to the Price to determine a TCO. This technique powerfully demonstrates the affect on Price of the other elements of Cost and neutralizes the buyer’s natural pressure on price.
This all looks like a lot of work to get to the end of the rainbow. You can be certain of that! Is Sales doing the buyers’ work for them? Maybe, but who ever said that figuring out what the buyer wants would be easy, anyway? The real issue is to decide whether it is worth the sweat? In today’s value-added world, you be the judge of that.
TOTAL COST OF OWNERSHIP
Worksheet showing the affect of certain Cost elements on a $10.00 purchase Price
| Cost Priority | MetricCost impact | Explanation/rationale of metric’s applicability | How to Apply |
Surcharge |
Totals | |
| Rate | Amount | |||||
|
#1
Quality
|
Rejection Rate |
Use a measured % of rejections |
Assume 5% rate |
5% |
$0.50 |
$3.00 |
|
Useful Life |
A $500 unit lasting 1 year costs more than one at $750 for 2 years |
$500/yr vs.$375/yr is a 25% shorter life |
25% |
$2.50 |
||
|
Sub total of surchages for Quality Cost element |
||||||
|
#2
Service |
Response Time |
Set a 1 day time limit. For each day beyond, add a 5% surcharge | If 2 days late @ 5%/day = 10% |
10% |
$1.00 |
$2.50 |
|
Convenience |
Some metrics are subjective. For these, estimate a Cost impact. | Assume a flat 15% factor for example |
15% |
$1.50 |
||
|
Sub total of surchages for Service Cost element |
||||||
|
# 3
Delivery |
On Time Delivery |
Fix a due date. Surcharge for every day late (or early). Example: 8 % | Assume 3 days late @ 8%/day equals 24% |
24% |
$2.40 |
$2.40 |
|
Sub total of surchages for Delivery Cost element |
||||||
|
#4 Price |
Price |
The price is the price Price is used as the basis of surcharge for the other three cost elements! | Plug in the $10.00 price used as a basis for the above surcharges |
None |
$10.00 |
$10.00 |
|
Grand Total of Sum of Surcharges for Quality + Service + Delivery + Price to get Total Cost of Ownership |
$17.90 |
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