Price is often the determining factor when making most product purchasing decisions. However, it’s only one aspect to consider. The sustainability movement has taught us that cost evaluations also involve social and environmental considerations. In other words: How much energy was spent sourcing, creating and distributing the product? What natural resources were impacted? How will the product be disposed?
This balance of consideration between social, economic and environmental outcomes comes together with the term “sustainable purchasing.” When making procurement decisions, we have to give equal consideration to the acquisition cost (price), use cost (consumption), disposal cost (resource stewardship) and efficiency cost (supply chain). Just as the USGBC’s LEED Certification program has made significant advances that consideration be given to a building’s operating expense, occupant comfort, site location and material sourcing (all of which can carry an initial higher price), the same types of considerations need to be applied toward our purchasing decisions regarding the true or “total” cost associated with product purchases. We need to think broadly and look beyond just price.
Understanding the other types of cost
It’s easy for us to measure price, but measurement metrics for consumption, disposal, resource use and supply chain efficiencies are more difficult to pin down. This means that such costs are often not considered in purchasing decisions, though they should be as they are the true costs paid for by businesses in the course of operations.
What are these costs?
Acquisition cost: In addition to the actual price of a product, businesses should also consider the costs associated with the actual purchase. How much time did an employee or employees spend finding the right product, ordering it and paying for the item? Was the process easy or was it unnecessarily laborious and time consuming? Other considerations can include ease of order placement, return policies, account management, customer service and invoicing options.
Use cost: This begins with product design features. Does the product’s design have potential for overuse? How well-made is the product? If the product is of lower quality, will that cause premature failure and require early replacement?
Disposal cost: This can begin with an evaluation of the product’s packaging. How much waste is created unwrapping the item? Subsequently, how is the product packaged for shipping? How much waste is created discarding shipping dunnage?
- Efficiency cost: These costs can run a wide gamut, but they essentially come down to shipping and distribution of product. How many warehouses does the supplier maintain? Depending on what items are being sourced, a supplier with multiple, strategically located warehouses can bring higher efficiencies, faster response times and lower delivery costs than a supplier with one or two warehouses.
Next page: Understanding "true cost"