1. Identify the value added opportunities that exist for reducing the customer’s total cost. This can be done by either company, but one of the most effective methods is to bring the customer and supplier together to identify the opportunities from both companies perspective. For customers this is the start of commodity / service planning. Each commodity / service group will have some of the same opportunities, but also some that are unique to those supplies / services. For the supplier it is the start of the development of a unique selling proposition.

2. Determine where the supplier is impacting the customer’s costs. Each opportunity has the potential of impacting a different set of costs. The use of the Impact Diagram (shown later) can help focus the user on specific cost areas and to identify the specific costs impacted. Companies that create an impact diagram for each event (such as energy audits, vendor managed inventory, summary bill, etc.) need only do the exercise one time for each opportunity. The impact diagram becomes a template for use each time a similar event occurs. Thus allowing future events to be measured and evaluated much faster.

3. Measure the reduction in the Total Cost of Ownership (TCO) resulting from the points impacted. Worksheets for each TCO category (there are 6) can be utilized for measuring the dollar impact a supplier has on the customer’s profits. These worksheets require that specific data be collected in order to measure the impact. The majority of the information required can be readily found, if the person measuring the event knows what to look for.

4. Report the results and compare it with price and performance to create a total cost comparison. Both the customer and the supplier need to see the total cost impact. Suppliers need it to be able to sell on a total cost basis and justify why the customer may have to pay a premium in order to save on total cost. For the customer, it is much the same. They need to be able to compare the total cost of doing business with one supplier against the total cost doing business with the other suppliers. Much the same way companies compare suppliers on a price basis today.