Alphabet Soup: TCO, ROI and YOU

By APICS CEO Abe Eshkenazi, CSCP, CPA, CAE
http://www.apics.org/

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APICS—the world’s leading community for end-to-end supply chain excellence.

Supply chain professionals know how to calculate the total cost of ownership (TCO), but now other leaders and decision makers are starting to pay closer attention. This week, Huffington Post featured “Manufacturers are Taking Aim at ‘Total Cost’ With On-Demand Manufacturing,” by Vicki Holt, president and CEO of Pronto Labs.

Consider the APICS Dictionary definition of TCO: “In supply chain management, the total cost of ownership of the supply delivery system is the sum of all the costs associated with every activity of the supply stream. The main insight that TCO offers to the supply chain manager is the understanding that the acquisition cost is often a very small portion of the total cost of ownership.”

Holt suggests that TCO provides a more complete guide to costs and a more accurate indicator of return on investment (ROI). As TCO plays a greater role in production and supply chain decision-making, new approaches are gaining momentum, she writes. On-demand manufacturing is the example highlighted in the article.

“On-demand manufacturing builds on previous procurement and supply chain concepts, including just-in-time manufacturing and lean manufacturing,” Holt writes. “Its goal is simple: produce parts as they’re needed, in the exact quantities needed, and do so repeatedly and cost-effectively. This typically yields lower total production costs as it improves supply-chain efficiency while reducing inventory and other administrative supply-chain costs.”

Some of the benefits of on-demand manufacturing include ease of moving parts from prototyping to low-volume production, reducing cost and complexity, improving on-time performance, reduction in inventory costs, and lower reliance on unreliable production forecasts.

“While the purchase price of a part from an on-demand supplier may be more expensive, the supplier’s use of cost-effective tooling — and ability to improve supply chain agility — can ultimately create better value for production volumes in the tens of thousands per year compared to the larger capital expense involved in working with a traditional [manufacturing] company.”

Supply chain and inventory management essentials

When thinking about the cutting edge of manufacturing and supply chain, it can be helpful to remember the basics. Consider the definition of just in time (JIT) as it appears in the APICS Dictionary: “A philosophy of manufacturing based on planned elimination of all waste and on continuous improvement of productivity. It encompasses the successful execution of all manufacturing activities required to produce a final product, from design engineering to delivery, and includes all stages of conversion from raw material onward. The primary elements of just in time are to have only the required inventory when needed; to improve quality to zero defects; to reduce lead times by reducing setup times, queue lengths, and lot sizes; to incrementally revise the operations themselves; and to accomplish these activities at minimum cost …”