Louis Bastone is one of those rare sourcing heroes who actually actively pursued a career in procurement, first by earning his Master’s degree in supply chain management and then as he moved on to procurement leadership roles.
Louis has seen just how powerful it can be when procurement doesn’t just value price but instead takes into account the total cost of ownership across all of their spend categories.
Procurement's Mindset Shift
In a recent episode of The Sourcing Hero podcast, Louis spoke about his purpose-driven journey into procurement and how his approach to Total Cost of Ownership (TCO) ultimately leads to stronger sourcing and award decision making, happier stakeholders, empowered suppliers, and more savings for the business.
Four Pillars of TCO
Louis breaks down TCO into four distinct pillars procurement can use to help clarify this approach for themselves, but also to their stakeholders:
- Purchase Price: This is what most people think of when considering cost. As Louis explains, “Generally when we think about cost in our everyday lives, we focus on the purchase price. This price includes direct materials, direct labor, overhead, administrative costs and profits.”
- Acquisition Cost: These are costs associated with getting the product or service where it needs to be, like costs for inbound freight sourcing, receiving, inspection, or storage.
- Usage Cost: “Usage cost is the cost incurred in converting the purchased materials into the finished product or service and through its life. So that's things like scrap, final inspection, warranties, lost productivity, returns, fuel, if you need to fuel whatever item you're purchasing,” explained Louis.
- End-of-Life Costs: When the product or service is no longer needed, there are still costs that add up. Louis describes these as “the costs incurred when the termination of the product or service happens, which is things like disposal costs, excess inventory, or the winding down of the project costs.”
Taking this comprehensive view of cost gives procurement a more accurate view of spend, but it also presents some new challenges to cost savings strategies.
Empower Suppliers to Lower TCO
One way to lower TCO, says Louis, is to empower suppliers to drive the innovation needed to ultimately lower total costs.
“Once you tell your supplier, ‘Hey, this is what we want the end result to look like… Give me the best solution to that,’ now we’re letting the people that do this every single day come up with those more creative solutions that procurement might never have thought of,” said Louis.
To accomplish this, procurement has to give suppliers the freedom to propose innovative solutions rather than locking them into rigid specifications. Taking this approach provides better results for everyone and demonstrates trust in suppliers’ expertise, building stronger supplier relationships that are good for the business.
Where to Start
If your procurement organization is transitioning from a price-based approach to TCO, Louis recommends starting with categories where the difference between purchase price and total cost is most significant.
“Look for the products or services that you’re sourcing that require more total cost of ownership than less,” he said. “If we’re purchasing a table versus a piece of capital, those are like night and day.”
Products or services that include maintenance costs, services costs, or other logistical costs with more variability required to run the product – as opposed to just a one-time buy – are a great place for procurement to start calculating and tracking TCO.
Communicating TCO to Stakeholders
In addition to tracking TCO, procurement also has to communicate back to the business and their stakeholders about areas of over- or under-spend. While these types of conversations can be challenging, Louis says that understanding stakeholder perspectives is the first step.
“I don't really like to use the word challenging, but more so collaborating with the internal stakeholders and having a negotiation with them to say, ‘help me better understand why you want this specific brand of this specific item.’”
Taking this approach with stakeholders helps them shift their focus on just fulfilling specifications (which can limit innovation and drive up costs) toward outcomes that, ultimately, suppliers can find creative ways to meet in more cost-effective ways.
This goes back to procurement’s role in the business and their relationship with internal stakeholders. Procurement should help their stakeholders make the distinction between an initial request and what they’re ultimately trying to achieve.
“I think that as procurement people, it's our job to push stakeholders more to ‘what end result are we looking for?’ Not ‘what do you want?’ Because those are two different things,” Louis said.
Don’t Put Out Fires, Prevent Them
Discussing total cost of ownership and aligning that with stakeholders’ desired outcomes positions procurement as a strategic partner rather than a roadblock, demonstrating to the business that considering TCO can actually help them achieve their goals more effectively than only focusing on price. According to Louis, that is the real definition of a sourcing hero in business.
“I think that a sourcing hero looks like somebody that doesn't necessarily spend their whole day fighting fires. And a lot of people in procurement spend their whole day fighting fires well, and a lot of them get rewarded for fighting fires. I believe that a sourcing hero is somebody who works hard on the stuff up front to make sure that fires never happen. And if they do happen, there's predetermined remedies to put those fires out themselves,” said Louis.
Preventing fires, rather than putting them out, by considering the total cost of ownership doesn’t just result in cost savings, but also stronger relationships, less risk, more innovation, and greater value creation for the entire business.
For more, listen to the full episode on procurement's mindset shift from Louis Bastone here:
