Here’s an important question: How do manufacturers cut costs and stay ahead of their competitors when developing new products? The answer is by evaluating Total Cost of Ownership (TCO) when new products are being conceived of and developed. TCO is the sum total of costs incurred throughout a product’s lifecycle, including not just price, but also risk, opportunity cost, hidden costs and recalls.
Ok, so how can my organization decrease its TCO?
Decreasing TCO must begin the second a supply partner is selected. Thus, choosing a great supplier is critical to optimizing TCO strategy. Generally speaking, an organization should ask itself 3 questions in order to determine the right supplier:
1. Is this supplier solutions-oriented?
B2B suppliers tend to focus on producing highly specialized products and services for their corporate customers rather than products with multiuse functions since during new product development, manufacturers are likely to envision the very specific product they will need from their supplier for their product’s needs before conducting any research to see if the desired product even exists.
In response to this practice, suppliers seek to anticipate customer demand based on solutions that their customers wish to solve. This can be effectively accomplished through TCO analysis on the part of the supplier. When suppliers conduct a thorough TCO analysis, they are able to better determine what their customers are likely to require from their product based on the project’s goals and challenges. Hence, suppliers can gain leverage in new product development by recommending a solution before their customer considers any of their own. As an added bonus, a supplier may also be able to reduce manufacturing costs and simplify the production process.
2. Can this supplier test new materials?
Suppliers that have established their own processes for testing their products save time on research and development all while ensuring they are meeting industry standards.
3. What value-added services and support does this supplier provide?
Simply put, the highest quality suppliers are those that set their customers up for perpetual success. This can be accomplished through training, proper machinery, and other efficiency-building services and strategies.
Syncing TCO Strategy with Product Lifecycle
It is best practice for suppliers to align the TCO strategy of their product to the lifecycle of the manufacturer’s product. From a manufacturer’s perspective, a product’s lifecycle is broken down into 3 phases: development, launch and growth, and maturity.
In the development phase, suppliers can ensure their product meets manufacturer and industry standards whilst simultaneously being produced at the target cost. During launch and growth, suppliers must focus on whether their production methods are compatible with market demand. Finally, in the maturity phase, suppliers can prioritize reducing costs per unit and making any necessary improvements to the product or production costs. It is important for manufacturers to choose suppliers that can respond to the challenges inherent in each lifecycle phase since changing suppliers as a product develops is both time consuming and costly.
Preventing Loss
While being an innovator is key to supplier and manufacturer success, it also carries a financial burden. Despite this, however, it is very possible for innovation and effective managing of costs to coexist when manufacturers opt to join forces with qualified suppliers (those that conduct a thorough TCO analysis). This ensures quality and the satisfying of regulatory standards, which in turn leads to the minimization of customer complaints and risk carried with defective products.
