Determine the Total Cost of Ownership categories that the supplier’s value added services or product features affect and the profit areas it could impact for the customer’s. There are six (6) categories to consider:

Revenues - The impact a supplier has on the customer’s sales. Usually by somehow increasing the customer’s output. Ex. A faster cutting tool could increased the production rate, resulting in more products the customer could sell.

Assets - The supplier’s ability to reduce the customer’s dollar investment in physical possessions (such as inventory). The value provided is the reduction in customer’s annual possession costs for owning the asset. Ex. Consignment would reduce the amount of inventory the customer owns, thereby reducing their possession cost.

Processes - The supplier’s ability to reduce the personnel cost involved in performing specific tasks. Ex. Summary billing can reduce the number of invoices that need to be processed, thereby reducing the overall cost for the customer in processing invoices.

Expenditures - Reductions in expected total annual costs paid for goods and services. Ex. Energy audits could identify steam leaks that result in higher energy usage. If the supplier can help stop the leaks it could reduce the total expenditures the customer has to pay.

Services - The value of the technical expertise that suppliers provide. Ex. If the supplier provided training it could allow the customer to avoid specific costs. Note: where possible you want to match cost savings to the above four categories, otherwise the savings become harder to justify.

Other - Not every cost that you impact falls neatly into the above categories, although for most companies these categories will account for 95% of the impact.