Hidden costs to spot when selecting solutions for your pharma supply chain

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Posted: 11/01/2017

Dia Romanowicz, Head of Global Sales – Thermal Products, Commercial Cargo at Amsafe Bridport looks at strategies to apply when comparing solutions for pharma supply chains by their total cost of ownership.

Thermal covers have proved to be a very cost-effective means of ensuring that pharmaceutical products can be transported safely.

However caution is advised.

The financial and non-quantifiable costs of some protective cargo cover systems can be eye-wateringly high when their total-cost-of ownership (TCO) is considered.

When you consider the total cost of ownership of a product or asset,  you should consider its economic impact over a complete period of possession rather than just at the point of its initial purchase. Such an analysis can enable alternative products to be objectively compared on the basis of overall value rather that just initial cost.

As many people know, the cheapest products to buy are rarely the cheapest to own in the long run. For example, everyone knows that an old car starts to cost an increasing amount as it gets older and starts to wear out.

Similarly, when determining the total cost of ownership of a thermal cargo cover one needs to consider the performance of the cover against both its initial purchase cost and costs in use.

 By considering in all the associated costs and benefits associated with a product over its normal life cycle, decision makers can make informed choices concerning the optimum product or solution for their specific needs.

TCO = Initial Cost + Ownership Costs + End-of-Life Costs - Residuals

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TCO vs cradle-to-grave costs

On the face of it total-cost-of-ownership (TCO) and whole-life-costing (or cradle-to-grave - C2G - costing as it is sometimes called), are more or less the same thing.

They both take a long-term view on the cost of owning and using an asset. But in fact they each have different scopes and relate to different time perspectives.

The TCO of a product relates to all the tangible financial costs incurred by the asset owner or user, both direct and indirect, including acquisition, ownership and ultimate disposal throughout a period of ownership.

A whole-life cost analysis, on the other hand, extends this to include all the costs and consequential impacts borne by third-parties that relate to the product’s use. These include the environmental and social costs of creating and using a product which accumulate all the way from the point of raw material extraction, through product usage, to its eventual long-term disposal.

These environmental and social consequences can be very intangible and very uncertain in nature and the inclusion of these elements into any cost-of-ownership exercise must be undertaken with very great care to avoid distorting the result.

Environmental impacts, for example, can be extremely difficult to identify and even harder to measure accurately. Add to this the difficulty of financially quantifying these impacts and it is easy to see how some whole-life-cost analyses can be of limited value as the basis for rational purchasing decisions.

This suggests that unless the environmental impacts are both beyond doubt and readily quantifiable they should be left out of the equation when it comes to determining the TCO of a product or asset.

This is not to say that these factors should be completely ignored, but it may be more sensible to consider these longer-term impacts separately, on a nonfinancial basis if necessary, and then cautiously factor the results into any subsequent purchasing decisions.

There is an old adage which say that 'you get what you pay for' but at the same time no-one wants to get ‘ripped off’

Components of total cost

In order to provide a fair and meaningful assessment of the TCO of a cargo cover, one that we can use as a basis for making selection decisions is to consider all the costs, both tangible and intangible, that are incurred from the point of purchase of the cover to its eventual disposal. This time-span equates to the operational life-cycle or ‘service life’ of the product.

Tangible costs in use

Prime cost: 
Since the initial, up-front, purchase cost of a thermal cargo cover is easy to establish and can be easily compared, it is hardly surprising that buyers and specifiers are preoccupied by this measure when it comes to selecting products. It is simply the net price paid for the acquisition of the cover.

Fitting costs: Different cargo covers can take widely differing times to correctly install on pallets. In particular, covers that are effectively fabricated in-situ from spools of insulation material, as well as only being as good as the standard of assembly are particularly labor-, time- and space-consuming.

Training costs:Most pre-shaped, factory-produced thermal cargo covers require minimal training to use correctly. Although with some types great care must be exercised in order to minimize the risk of cover damage from box corners, load projections etc.

Spooled cover materials:These require much skill to use and apply correctly if unacceptable risks are to be avoided and the cost of the necessary training required for this must be offset against any perceived savings.

Storage costsThe materials in common use for thermal cargo covers vary widely in terms of volumetric bulk and this can impact heavily on the storage costs involved. Cargo covers which employ bubble air-entrapment, for  example, can be very difficult to store since they are extremely voluminous and there is no possibility of compression storage.

Fibrous insulation, on the other hand, may provide equivalent thermal performance for a much lower volume and can generally be compressed or vacuum-packed for a significantly reduced storage requirement.

Transportation costs: Reusable covers tend to be heavy and high bulk. The volume of some thermal cargo covers in particular can make a noticeable contribution to air-freight costs due to the addition of dimensional weight charges.

It also results in a reduction of the shipment payload which can add up to a significant on-cost especially once more with air-freight. And if it is not possible to use the cover for a reciprocal product on the return leg then, again, the product will benefit if it has good compressibility characteristics to minimise volume.

Other volume/weight considerations: cover bulk and weight does not just impact freight and storage costs. Larger/heavier covers make  handling and fitting much more difficult and labor-intensive, often needing additional personnel and mechanical aids.

Transactional costs: These are another important consideration when to comes to cost. Sometimes low prices mask ‘hidden’ surcharges and unfavorable commercial terms. There may, for example, be penalties for ordering in small quantities or insufficient discounts for ordering large quantities. In some cases the credit terms attached to a low price can be disadvantageous.

Disposal costs: Most plastics such as spun-bonded polyethylene can normally be recycled 4 to 5 times before physical properties are substantially affected. However, some other plastics are not suitable for recycling and either end up in land-fill or are ‘downcycled’ into lower-grade products.

It is important to note that even where a product is manufactured from recyclable materials, if it is made from different materials that are intimately connected to each, such as bubble/foil laminations, this will almost always render the cover unrecoverable due to the cost or physical impossibility of separation.

Another problem relates to the fact that the micro-contamination that tends to accrue over a multi-use product lifecycle can often render a product completely unrecyclable.

In the next installment Dia will examine the intangible costs. 

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Posted: 11/01/2017

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