Introduction:
"On cost" is a crucial concept in procurement that refers to additional expenses incurred beyond the base price of a product or service. It encompasses various costs associated with procurement activities, such as taxes, duties, transportation, insurance, and handling fees. In this article, we will delve into the concept of "on cost" in procurement, its significance, and provide examples and case studies to illustrate its practical implications.Understanding "On Cost" in Procurement:
"On cost" represents the supplementary expenses incurred during the procurement process that are not explicitly included in the initial price quote. These costs can significantly impact the overall cost of acquiring goods or services and need to be considered when evaluating the total cost of ownership. "On cost" expenses typically include:
1. Taxes and Duties: Value-added taxes (VAT), customs duties, and other levies imposed by governments on imported goods or services can contribute to the "on cost" of procurement.
2. Transportation and Logistics: Costs associated with shipping, freight, storage, and handling of goods are important components of the "on cost" calculation. These expenses can vary depending on the distance, mode of transportation, and complexity of the supply chain.
3. Insurance: Procurement professionals often need to account for insurance costs to protect goods in transit, ensuring their safe arrival. This may involve additional insurance coverage for high-value or delicate items.
Significance of "On Cost" in Procurement:
1. Accurate Cost Assessment: Considering "on cost" in procurement allows for a more accurate assessment of the true cost of acquiring goods or services. Failing to account for these additional expenses may lead to budget overruns and misalignment with financial forecasts.
2. Supplier Evaluation: Evaluating suppliers based on their ability to provide comprehensive cost estimates, including "on cost," enables procurement professionals to make informed decisions. Suppliers who transparently disclose all potential costs can be preferred over those who provide incomplete or misleading pricing information.
3. Budgeting and Planning: Incorporating "on cost" in budgeting and planning processes helps organizations allocate resources effectively and mitigate financial risks. It ensures that procurement activities align with the overall financial objectives and constraints of the organization.
Examples and Case Studies:
1. Example: Company XYZ is procuring machinery from an international supplier. In addition to the base price quoted by the supplier, the "on cost" includes customs duties, transportation fees, and insurance costs associated with shipping the machinery to the company's facility. By accurately assessing the "on cost," Company XYZ can budget and plan for the total cost of acquiring and installing the machinery.
2. Case Study: A construction company is awarded a contract to build a bridge. While estimating the project cost, the procurement team considers the "on cost" associated with taxes, permits, transportation of construction materials, and insurance. By factoring in these additional expenses, the company develops an accurate budget and avoids cost overruns during the project execution.
Conclusion:
Considering "on cost" is crucial in procurement as it encompasses the additional expenses beyond the base price of goods or services. By accurately assessing and incorporating "on cost" in the procurement process, organizations can make informed decisions, develop realistic budgets, and mitigate financial risks. The examples and case studies presented in this article highlight the practical implications of "on cost" in procurement. Procurement professionals who account for these hidden expenses can optimize their procurement strategies, negotiate effectively with suppliers, and ensure the overall financial success of their organizations.