Do You Really Save Money When You Buy at the Cheapest Price?

By IBT Inc

September 18, 2013

Bearings

Lowest price is not the same as lowest cost, said Todd Snelgrove, the Global Manager of Value at SKF. In fact, a 2013 survey by Manufacturers for Productivity and Innovation shows that industrial companies that buy on total cost of ownership (TCO) are 35% more profitable than companies that do not.

More: Get SKF’s white paper, “The Way to Drive Real Sustainable Profit to the Bottom Line”

The Cost Savings Get Lost

Snelgrove is passionate about helping businesses save money. He travels across the globe giving talks on the topic, and has published in the field of TCO.

“Too often, companies act in silos—but with good intentions,” Snelgrove said. “While the purchasing department is buying the cheapest equipment, the maintenance team is out on the floor trying to get the most life out of it. So the cost savings get lost.”

More: About SKF

Total Cost of Ownership for Equipment

Snelgrove said that it’s important to consider 3 things in the total cost of a product or piece of equipment:

  • Acquisition
  • Operation
  • End of life

“Most people only consider the acquisition cost,” Snelgrove said, especially when purchasing agents are rewarded on reducing costs. The problem? Acquisition price has been found to be only 11% of the TCO.

“They don’t consider the cost of operations, the maintenance, or the costs—or benefits—of disposal later,” he said. “Purchase price is only one small part of a product’s total cost.”

How to Find the Real Price of a Product

To get a better solution that truly reduces costs over the life of the product, Snelgrove recommends that purchasing agents speak the language that executives understand: money. He suggests justifying cost savings in terms of total cost of ownership, rather than purchase price—and asking suppliers to help with the analysis.

In fact, his company, SKF, has helped their customers save a total of $3.75 billion in accepted or verified savings over the past 12 years—on 39,000+ separate purchases—by using a total cost of ownership model.

To find the “real” cost of a product or piece of equipment, Snelgrove recommends looking at:

  1. Revenues. If downtime is reduced (or production rates increased), it may quickly justify the extra cost over a cheaper product.
  2. Expenditures. Will this model reduce the amount of scrap or rejects? Will there be fewer repairs?  How about less energy usage over the next 2 years?
  3. Personnel. If maintenance time or operation time is reduced, it may free up employees to do other tasks.
  4. Assets. Can machine speed be increased by using a higher-cost item—without increasing the overall wear and tear? Will you be able to spend less money on additional equipment, servicing, or tools with this model?

Real-World Examples of Savings

Snelgrove keeps a file with several real-world examples of companies who paid more upfront to save bigger money down the line. One manufacturer upgraded to a solution bearing and implemented proper maintenance practices, and was able to increase annual production by 4%—improving their profit by 19 million rubles.

Another global customer invested in SKF maintenance tools and training. The company saved 362 maintenance man-hours each year and increased their machine life by 10%—resulting in a total savings of 1 million yen.

“People do what they’re measured on,” Snelgrove added. “It’s time for companies to be smarter about how they cut costs, and reward employees for saving on total cost of ownership, rather than straight price.”

Want to Learn More?

To learn more about SKF and Snelgrove’s work with TCO, download the white paper, The Way to Drive Real Sustainable Profit to the Bottom Line.