Total Cost of Ownership and Should-Cost Analysis in Procurement

Course overview

Course outline

1. 1Day One: Beyond Price: The Economics of Buying

   • Price, Cost and Value: Why the cheapest offer is often the most expensive decision
   • Cost Analysis in the Sourcing Process: Where TCO and should-cost add value
   • Cost Structures: Fixed and variable costs, direct and indirect costs, and economies of scale
   • Understanding Supplier Economics: How suppliers build prices and where margins sit
   • Data Sources: Internal records, supplier data, market indices and industry benchmarks
   • Spreadsheet Foundations: Structuring transparent and auditable cost models
   • Case Study: Comparing two equipment offers where the lower price produced higher lifetime cost
2. 2Day Two: Building Total Cost of Ownership Models

   • TCO Cost Categories: Acquisition, ownership, operation, risk and end-of-life costs
   • Hidden Costs: Installation, training, downtime, quality failures, inventory and administration
   • Time Value of Money: Discounting, net present value and life-cycle comparison
   • Services and Software TCO: Licences, subscriptions, support, integration and exit costs
   • Sustainability Costs: Energy, emissions, waste and disposal in whole-life decisions
   • Using TCO in Evaluation Criteria: Integrating whole-life cost into tender evaluation
   • Workshop: Building a TCO model to compare three competing supplier offers
3. 3Day Three: Should-Cost Analysis

   • Purpose of Should-Cost: Fact-based estimates of what an item or service ought to cost
   • Breaking Down the Product: Bills of materials, specifications and process steps
   • Material and Labour Costing: Quantities, scrap rates, wage rates and productivity
   • Overheads, Logistics and Margin: Reasonable allowances and industry norms
   • Service Should-Cost: Modelling labour-based and outcome-based services
   • Validating the Model: Cross-checking with benchmarks, experts and supplier information
   • Practical Exercise: Developing a should-cost model for a fabricated component
4. 4Day Four: Managing Uncertainty and Negotiating with Cost Data

   • Cost Drivers and Indices: Linking prices to commodities, currencies and labour markets
   • Sensitivity Analysis: Identifying which assumptions matter most
   • Scenario Planning: Best case, expected case and worst case cost outcomes
   • Price Adjustment Mechanisms: Index-linked clauses and cost-sharing arrangements
   • Setting Negotiation Targets: Using cost models to define opening positions and walk-away points
   • Fact-Based Negotiation: Discussing cost elements with suppliers constructively
   • Role-Play: Negotiating a price increase request using should-cost evidence
5. 5Day Five: Embedding Cost Analysis in Procurement

   • Presenting Findings: Turning cost models into clear recommendations for decision makers
   • Collaborating with Stakeholders: Engaging engineering, finance and operations in cost decisions
   • Supplier Development: Using cost insights to improve supplier processes and share savings
   • Measuring Savings: Cost avoidance, cost reduction and reporting procurement value
   • Building Capability: Templates, tools and training for consistent cost analysis
   • Common Pitfalls: Over-precision, poor data quality and ignoring risk
   • Capstone Exercise: Presenting a sourcing recommendation supported by TCO and should-cost analysis