Total Value Management

Purchasing has evolved from simpler buy and sell to find absolute value of every dollar amount you spent.
There have been many concepts to ascertain value of spent.

PPU: Price per Unit, it is the cost paid for each bought unit. Although it never gives the true cost of owning the unit

TCA: Total Cost of Acquisition, It takes into account multiple variables – PPU, transportation costs, duties, tariffs, temporary storage costs, and any other external cost that is incurred from the time an order is placed to the time the product is received.

TCO: Total Cost of Ownership, The most talked about concept. It takes into account all direct costs (such as PPU, transportation, tariffs, etc), indirect costs (product utilization costs, switching costs, transaction costs, etc), and quantifiable market costs (quality, brand, etc.). It captures every cost associated with the product and gives a total usage cost and it is often considered the best comparative cost metric.

However All concepts were cost based concepts and were focused on short term goals of cost optimization. Now the latest concept to measure sourcing value is TVM (Total Value Management).

TVM: Total Value Management, It is a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals.

To understand this concept take an example of a sourcing done considering Total Cost of Ownership and Multi Year Contract is awarded with considerable cost savings based on the current cost model. But no overview is done on the actual implementation of the contract. If due to certain issues you were forced to give extra money like due to urgent shipment, late order, sudden breakdown of the current tool etc the actual savings after the contract period becomes negative due to extraordinary “leakages” in the system.

TVM concept not only takes into account the overall total cost of each acquired unit from a direct, indirect, and quantifiable market cost viewpoint, but the impact costs of deviating from the overall sourcing and supply chain strategies.

Strategic sourcing is sourcing for value, not lowest cost. Sometimes value is gained by selecting a lower cost provider, and sometimes value is gained by selecting a higher cost provider with greater quality and reliability. Producing poor quality products or failing to meet demand hurts both current and future sales. TVM insists all value-based measures and costs are included in the model, thus minimizing potential risks.