Working in procurement means that you are always seeking methods to improve the efficiency of your operations or find cost-saving opportunities.
So why not take an all-inclusive approach and learn how much it really costs to acquire that new product or service for your company?
Well, it is a good thing it exists something called procurement lifecycle costing
What is Procurement Lifecycle Costing (PLC)?
We can define procurement lifecycle costing (PLC) as the method that helps you to understand the total cost of acquiring, owning, and of course, eventually disposing of a product or service. Instead of only focusing on the purchasing price, PLC works from a complete perspective.
PLC takes into account all costs associated with the product throughout its lifecycle. These costs typically include:
- Initial Costs: Purchase price, installation, and setup fees.
- Operational Costs: Energy, maintenance, and repair expenses.
- End-of-Life Costs: Decommissioning, disposal, or recycling.
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Why Lifecycle Costing is Important in Procurement
Long-term savings
See? We told you there would be cost-saving opportunities involved. For example let’s say that you buy a product with a lower purchase price and think that you’ve gotten a great deal, without realizing that it could require frequent repairs or consume more energy, leading to higher operational costs at the end of the day. PLC helps you identify options that minimize these expenses.
Sustainability goals
If your business prioritizes sustainable practices it should if consumers' behavior and interests are anything to go by, considering lifecycle costs makes it easier to select products that are more friendly with the planet.
Risk management
The more we advance as a modern society, the more exposed we are to new risks, like cybersecurity problems. If you learn to predict and budgeting for all associated costs, you reduce the likelihood of unexpected financial burdens.
Better supplier selection
Vendors offering products with optimized lifecycle costs often means they will provide you with products that are higher in quality and have a more reliable service to your business.
Steps to Calculate Lifecycle Costs
- Identify the Scope: Determine which costs you will include, such as acquisition, operation, and disposal costs.
- Gather Data: Collect detailed cost information from vendors and internal sources.
- Analyze Initial Costs: Include purchase price, transportation, installation, and setup.
- Estimate Operational Costs: Calculate recurring expenses like maintenance, energy use, and consumables.
- Evaluate End-of-Life Costs: Consider decommissioning, disposal, or resale value.
- Apply Discount Rates: Use a discount rate to account for the time value of money, converting future costs into present value.
- Compare Alternatives: Use the total lifecycle cost to evaluate and rank options.
Okay, looks interesting, but it sounds a bit like another metric, such as total cost of ownership (TCO)
Are they the same?
A quick question would be: No
But let’s see the differences more clearly
Lifecycle Costing vs. Total Cost of Ownership
At first glance, lifecycle costing and total cost of ownership could look like the same thing, but some aspects of each make them really different.
Scope
As we have seen lifecycle costing focuses on the entire lifespan of a product, from the moment it’s acquired to the point where it’s no longer needed.TCO, on the other hand, stops at the operational phase.
Application
This is one key feature to bear in mind, as TCO is more commonly used for assets like machinery or vehicles, while PLC applies to a broader range of procurement scenarios.
Real World Applications
And speaking about applications, let’s make PLC even easier to understand with the following cases:
Construction
If your business operates in this industry, you might know that selecting materials that cost more upfront but have lower maintenance and replacement costs can save you money in the long run.
IT equipment
Making this type of purchase usually involves large amounts of money so it’s a good plan to seriously evaluate systems or computers based on your requirements, this way you know that you’re investing in technology that works for you.
Transportation
Another big purchase here. Choosing vehicles with lower fuel consumption and maintenance needs can make a big difference to your operational budget.
Manufacturing
If you choose to work with machinery that balances durability with operational efficiency you can build the path to long-term profitability.
Retail
Investing in store fixtures that offer longevity and lower upkeep expenses reduces costs over time.
Best Practices for Procurement Lifecycle Costing
Clarify your Assumptions
The analysis should work for your needs so start by defining the parameters of your assessment Be specific about factors like expected usage, maintenance schedules, and operational lifespans. Doing this helps you avoid misunderstandings later.
Analyze variability
Once you’ve defined what you want to achieve conduct scenario testing to see how your outcomes might shift under different circumstances. For example, how would changes in energy costs or maintenance requirements affect your total expenses?
Update your models
Nothing remains in the same position, not even the products or services you use so bear in mind that you’ll need to collect real-world data and incorporate it into your calculations. The outcome? Improving the accuracy of your lifecycle cost assessments over time.
Follow proven frameworks
There’s nothing wrong with relying on established methodologies, such as international standards, to bring consistency and reliability to your evaluations.
Be comprehensive
Include every relevant expense in your analysis, from operational costs to final disposal. If you go and overlook a critical aspect of your expenses you could put your company at risk of undermining the accuracy of your calculations.
Consider risks
Think about external variables like regulatory shifts, technological advances, or changing market conditions. Assess how these risks could influence costs and learn what routes you could follow to cause only the minimum impact on your operations.
Choose technology
Use dedicated software tools to have a better handling of your data collection and perform more complex analyses. Yes, you’ll need to spend money on a procurement software, but you won’t believe the amount of time you’ll be saving.
Seek a range of estimates
Get cost projections from multiple sources to increase the reliability of your inputs. The more perspectives you have, the better you’ll understand the potential variations.
Keep detailed records
Last but not least, don’t forget to document every part of your process, and include everything, from the initial assumptions to the final results. This transparency makes it easier to refine your models and justify your decisions to stakeholders.
Key Takeaways
- Lifecycle costing offers a comprehensive approach to evaluating procurement decisions by considering all costs throughout a product’s lifecycle.
- By adopting this method, you can identify long-term savings, support sustainability goals, and mitigate financial risks.
- Implementing best practices, such as updating your models with real-world data and using dedicated software tools, enhances the accuracy and effectiveness of lifecycle costing.
- The approach applies to a wide range of industries, helping businesses balance cost, quality, and environmental impact.
- Incorporating lifecycle costing into your procurement process equips you to make informed decisions that align with both your financial objectives and broader business goals.
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