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Identification of true total costs of ownership, supplier price, and the balance of cost driven analysis within the supply management organizations are a clear and ongoing mine field that must be continually cleared on a regular basis for careful passage. A dollar saved through supply management efforts is the same on the balance sheet as a dollar of lower overall cost through strategic procurement. The total cost of ownership begins with the true cost analysis of the supplier’s price with expectation and concern to the relative market driven associated costs. The most fundamental question to be asked is, what are the true costs associated with individual elements that make up comparative costs. The market through competition has drivers and levers that can change the values of unique processes of strategic cost management. “TCO criteria are very useful when measuring distributor performance because typically a distributor’s price is higher than a component manufacturer’s price, but the distributor offers many materials management programs that often mean a lower total cost of ownership.” (Carbone, 2004) Too much competition can lead to “…a skimming strategy, where they price the product high early in the product’s life cycle in order to capture as much profit as possible before competition forces price reductions.” (Smith, Buddress, p.449) Therefore, a cost plus approach is usually not very successful in markets where competition does exist. Further, the activity based costing methods between suppliers and purchasers should be done in the open to allow the market to adjust or correct price variances. By understanding these true costs for goods and services, cost analysis can then begin to break down the comprehensive barriers associated for these materials and determine with overall tactical goals of the company, the various impacts of pricing. Firms have trouble grasping the total cost of ownership along with fixed costs and indirect costs. These variable costs can change with the economies of scale, production, and inventory levels. “By analyzing cost information and categorizing costs according to direct, indirect, variable, and fixed categories, a supply manager can prioritize concerns. In fact, the greatest power might be found in combining the categories.”(Smith, Buddress, p.459) Fixed indirect costs might come into question more than variable costs, however, when in doubt cost modeling might be helpful. A graph analysis can yield a wealth of information and when used with simple logic and estimated guess can be improved. Regression analysis and business statistics also help with pricing costs. However, the difficultly of getting lost in the numbers does occur if we don’t actually understand what is being modeled and why. “The truly effective supply manager does not ignore cost analysis in order to save relationships. Instead, she or he uses price and cost analysis to drive successful relationships with suppliers.”(Smith, Buddress, p. 467)

Frank - I think there are some macro trends very worthy of focus in 2009. A couple that come to mind are: 1. Volatility - given the economy, the globalization of supply chains and the ever shortening product lifecycles, we're seeing increasing volatility as a central theme/challenge facing companies in 2009. Volatility of demand, supply and product are all combining to create a very fast paced environment. 2. Supply chain risk - volatilty has an impact on supply chain risk, but there are other drivers as well. Too many companies are ill-equipped to deal with risks of all kinds. The big risks (earthquakes, floods, etc.) get the attention, but increasing risk is everywhere. Most organizations think about risk departmentally and not holistically. 3. Economy - don't think this is a surprise to anyone, but the effects of the economy on supply chains and manufacturing are key themes for 2009. The emphasis has moved to cost reductions in part due to increasing volatility. Can anyone accurately predict demand today? If you've been relying on statistical forecasts to drive your supply chain, you're in real trouble since the past is likely not an accurate indicator. Hope these suggestions are helpful.