Acquisition Costs

Acquisition Costs


Acquisition costs are the initial costs associated with the purchase or materials, products, and services. They are not long-term costs or ownership but represent an immediate cash outflow. Scrutinizing purchase price, planning costs, and quality costs to determine the lowest total cost of ownership/usage may provide significant savings.


Purchasing Price


The price paid for direct and indirect materials, a product, or a service is frequently the major component in an item’s total cost. Acquisition costs may include freight and delivery, site preparation (capital purchases), installation, and testing. Supply management professionals can reduce acquisition costs by negotiating effectively, obtaining quantity discounts, standardizing specifications, and completing a value analysis. In addition, strategic cost analysis offers methods to analyze and understand suppliers’ costs, allowing for more fruitful negotiations and enhancement of supplier relationships. The purchase of used materials and equipment of acceptable quality is another way to lower acquisition costs. A supply management professional must not compromise long-term ownership costs by focusing on the purchase price alone.


Planning Costs


Costs incurred during the acquisition process include the costs of developing requirements and specifications, performing price and cost analysis, supplier selection/sourcing, contract determination, initial order processing, and monitoring. Increasing spending in these areas at times can reduce future ownership/use costs. For example, during the development phase of a new product, time spent with engineering representatives and the supplier to replace custom parts with standardized ones generally will reduce the initial purchase price as well as lower future repair, replacement, and inventory carrying costs.


            Subscribing to e-procurement, B2B e-commerce, or electronic supply networks provides many businesses with a means to lower acquisition costs by reducing or eliminating overhead such as the time-consuming research and paperwork often associated with ordering the best product or service to satisfy specifications. The higher initial developments and start-up costs are negated by the potential benefits of better communication, more information, reduced clerical overhead, and lower purchase costs.


            Quality Costs


The higher initial cost of engineered-in quality during the design phase generally lower future ownership and post-ownership costs for both the purchaser and the customer. Selecting and certifying a supplier to obtain the optimal level of quality and monitoring the results by using, for example, design of experiments and statistical process control ensure the achievement of the desired quality. Long-term strategic relationships improve communications and may facilitate product innovation and cost reduction, especially in a cross-functional environment.



According to Richard Janis, a partner with KPMG LLP, a firm that sources internationally must address the impact of taxes, both direct and indirect, on the costs of procured materials and products. “Companies spend endless hours haggling over freight rates the cost of warehousing services, and the purchase price of goods. But they typically pay little attention to the hidden expenses that can inflate a supply chain’s costs. One of the most pervasive of these hidden expenses its taxes. Supply chain managers need to sit down with their tax colleagues to minimize the global impact of all taxes on supply chain operations.” Janis adds that when sourcing nationally, a firm must consider differences in state and local taxes. Experienced tax professionals must be included in the cross-functional team when taxes are a concern. Janis provides examples of ways to reduce acquisition costs by minimizing taxes:


  • ·        Customs duties and tariffs-focus on compliance to eliminate penalties and on planning to ensure that the proper tariff classifications with the lowest rates are applied.
  • ·        Regional trade agreements-source and/or produce in free trade areas that reduce or eliminate duties on all or part of a product.
  • ·        Income-base shifting-use transfer pricing to shift income legally from high-tax areas to lower-tax areas.


The impact of taxes can be significant. The added cost of addressing domestic and international tax issues up front may have a significant effect in reducing the purchase price.


            Financing Costs


Whether purchasing inventory and materials, opening new facilities or investing in equipment, the acquisition team should consider the quantitative and qualitative costs of financing alternatives, which are considered ongoing acquisition costs. A business can finance an acquisition by using surplus cash, debt financing, or equity financing. Each form of financing has costs and benefits. The creditworthiness of the firm and the expected return on the investment are key variables in making this determination. The cost of money is normally not a supply management professional’s concern but must be considered by the firm.