Ask The Expert - Apply the Model - TOTAL COST OF OWNERSHIP

• Successful application of TCO
• How to apply this methodology in your organisation – practical application

Ask the Expert - Total Cost of Ownership Q&A

Q 1- How is Total Cost of Ownership applicable in the following?

1. Procurement of diagnostic equipment and devices
2. Procurement of capital items, e.g. Vehicles

A – It is important to note that diagnostic medical equipment fall in the category of capital assets. These are assets which the procurement organization uses for a long time, usually several years and which are characterised by high acquisition cost and high initial capital outlay, contrary to operational items which are mainly purchased for short-term consumption, production use or resale and which are comparatively inexpensive.

Procurement of medical or diagnostic equipment in the public sector is based on the lowest bid price as revealed by research findings. The price/cost iceberg in today’s presentation highlighted this fact as the only and the most obvious or visible “tip”. However, modern procurement view and best practice is that “cost” and “value” are far broader concepts than just the purchase price of an asset. Current thinking emphasises that the benefits and costs of any capital procurement be analysed in advance, in order to present a business case or justification for the purchase. Considering the long lifespan of sophisticated medical or diagnostic equipment, the purchase price though an important consideration may be a misleading concept in the procurement process. The purchase price may constitute only 10% of the Total Cost of owning the equipment over its lifetime. Total Cost of Ownership (TCO) also known as Whole-Life-Cycle Costing (WLCC) or just Life-Cycle Costing (LCC) considers all cost items that need to be reflected before purchase any technology, including softwares.It takes account of all costs that arise during the operation and disposal phases of the equipment lifecycle. Typically for a diagnostic equipment such costs would include:

• Acquisition cost (one-off purchase price)
• Delivery/freight cost
• Offloading cost
• Installation and commissioning costs
• After-sales cost e.g. training of operators
• Maintenance costs (preventive and corrective ,including spares and repairs)
• Downtime costs
• Utility costs (energy and water)
• Software upgrades
• Administrative costs e.g. Supervision and Quality management such as in ISO certified environments, personnel costs
• Decommissioning and disposal costs

The above consideration places the procuring entity at a better decision making and negotiating position. The same consideration applies to acquisition of motor vehicles. The procuring organisation needs to look beyond the acquisition of price during budgeting and planning .They should also consider:

• Vehicle performance
• Maintenance (repairs,service,etc)
• Cost of personnel e.g.drivers,mechanics whether in-house or outsourced
• Insurance ,which may include towing
• Fuel
• Security and fleet management systems

The decision may be very critical when considering procuring a new or used vehicle. The cost of ownership of a used vehicle may turn out to be much higher than that of a new car. Procurement officers are best advised to be wary of what may appear to be great and attractive sales incentives or bargains. Remember the old adage that says “When the deal is too good, think twice”.

Overall, it is best practice to involve all the stakeholders in capital asset procurement. For both medical equipment and motor vehicles involve the finance and technical experts. Invite participation of medical personnel, IT and drivers/mechanics, so that the final decision delivers value for the whole organization and meets the corporate objective. Cross-functional team working is highly recommended.

Q2 – How to raise capabilities to in country public health? In some cases the vendors are very “aggressive” or offer some presents.

A – It is not an uncommon practice that some vendors spend significant marketing budgets and efforts on influencing the product specifications with requisitioners. Some may use more “aggressive” approaches too.

To raise the capabilities of the requisitioners (also called capacity building in some organizations) that have to deal with such business practices, organizations can roll-out various activities:

• Training: provide Public Procurement training courses to professionals directly or indirectly involved in the procurement process (pharmacists, medical doctors, nurses, etc.). Such courses usually cover ethics, transparency, and typical procurement processes, together with the DO’s and DON’T’s of dealing with suppliers sending presents (gift policies).
• Technical assistance: This means procuring on behalf of a public health agency in the first place to then support the recruitment, training, and professionalization of local staff members to build a procurement unit.
• Knowledge transfer: In addition to technical assistance, knowledge should be formalised and transferred to the public agency so that it can reduce the need for technical assistance. Technical assistance can then remain focused on strategic commodities or phased out completely once capabilities are raised to the required standard.

While not directly part of the capability building, a sustainable financing model for the public health agency is key in order to retain its trained staff and provide a career and professionalization path. If not, an organization will have to start the training, technical assistance, and knowledge transfer cycle again.

Q 3 – What is the relationship between Total Cost of Ownership and Sustainable procurement?

A – Procurement is progressively transforming into a Sustainable Procurement function. Practically, it means that the environmental and social criteria are now considered as costs to be included in the Total Cost of Ownership. Pricing and evaluations of tenders will have to include factors such as the environmental impact of goods and transport (e.g. the carbon footprint of transport), the disposal of goods at an hospital, the recycling of materials, but also ensuring that no child labour or poor working conditions were utilised for the production. Request for Information and pre-qualification questionnaires should include “green” and modern slavery questions.

The new formula of the Total Cost of Ownership is including environmental and social criteria and costs components to compare offers from tenderers. The best value for money equation will therefore also consider such criteria.

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