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TCO – Total Cost of Ownership – III
June 13, 2008
One of the finest examples of benefitting from a TCO perspective was displayed by one of my raw materials sourcing teams while I was CPO at Bethlehem Steel.
The subject was coal sourcing, and the conventional wisdom in the steel business at that time was to negotiate hard to optimize the “delivered cost” of the coal needed in your coke ovens (or, in the case of iron making, the coal needed for injection into the blast furnace).
The raw materials teams at Bethlehem were cross-functional and highly-talented. The coal team included experts with backgrounds in mining operations, finance, research, procurement, and logistics.
The team responsible for “injection coal” raised the possibility that by buying higher-quality, more expensive coal there would be an in-furnace “process economics” advantage through higher performance in the blast furnace. They presented their case to the superintendent in charge of the blast furnace operation, and he agreed to a trial. The trial confirmed that the improved yields generated a benefit of several TIMES the initial price disadvantage. With this information in hand, and the full support of the internal client in operations, the team proceeded with a sourcing strategy and negotiation that ultimately was a big win.
Posted by Robert A. Rudzki on June 13, 2008 | Comments (1)
In response to: TCO – Total Cost of Ownership – III
Robert commented:
TCO concept once again confirm the importance of Process view in business analyis and solution proposal. the trickest part of TCO is what and how you include the non-price costs into the analysis, which will ultimately determine the success of TCO. So appreciate more elaboration on this part