Best price versus lower cost—February 2014 print edition

Tracking KPIs among the tools to help public organizations focus on the actual costs of goods and services

March 7, 2014
by By Denise Flint

A discussion entitled Total Cost of Ownership (TCO): Strategies Beyond Pricing at the Canadian Public Procurement Forum 2013 drew a large crowd as panel members David Davidson, Bruce Gorman, Eddy Jin and Terry Kyritsis talked about the vast chasm that can loom between the cheapest cost and the lowest price and what the total cost of ownership means at their educational institutions.

Jin, director of procurement services at the University of Toronto, opened the session by explaining that his department handles a budget of $2.4 billion and buys items for everyone from rocket scientists to molecular geneticists. Yet they don’t have a huge staff compared to other universities. The answer to handling the overwhelming demand on their services is through e-procurement. Making a purchase online can save several hours over the cost of a phone purchase, which results in huge productivity savings. As well, vendors are often happy to waive such costs as shipping charges for the convenience of having uniform order forms, contracts and payment schedules. The result is enormous savings in both productivity and total price, significantly reducing the TCO.

Gorman followed with a discussion of procurement practises at Memorial University of Newfoundland, which does not have a central procurement department. The university is highly decentralised and all faculties, schools and administrative units can create their own purchasing orders and control their own purchasing decisions. As well, the NL Public Tender Act defines the best bidder as the lowest bidder. The university is currently reviewing its purchasing policy to factor the total cost into its purchasing structure including transportation, scheduled maintenance, equipment calibration, extended warranties and training.

Kyritsis, CEO of the Ontario Education Collaborative Marketplace, described cost and price as similar to an iceberg, with price (the amount paid to the supplier) being the relatively small section above the water and cost (internal practises, processes and requirements) being the much larger part hidden below. He illustrated his point with a description of the way sand is purchased for kindergarten play tables. Cheap truckloads used to be delivered to a central storage unit where it was bagged and distributed to schools across the province—a very time consuming and labour intensive process. Switching to direct delivery of smaller quantities to individual schools resulted in huge savings even though the apparent price was higher.

Total cost of ownership is a philosophy, a methodology and a tool that must include acquisition costs, ownership costs and post-ownership (disposal) costs, Kyristsis concluded. Davidson, CEO of Interuniversity Services Incorporated, reported that for every dollar spent by the 18 post-secondary institutions for whom his organization provides services they receive five to six dollars back in savings.

“The total cost is the real cost and the lowest unit price is not the professional procurement way,” he told the audience.

According to Davidson, the way to keep the focus on the real cost of procurement is through key performance indicators because decisions based on numbers are easy to defend. “It’s not about the quality of the pen—most suppliers get their stuff from the same manufacturers—it’s about the actual cost.”