10.2 Introduction

What do you know about icebergs? You've probably heard that most of an iceberg's mass—almost 90%—is under water. Hence, the phrase, "tip of the iceberg." You may also know that an iceberg's maximum width can be 30% larger than what you see at the surface. This not-so-little fact is what makes icebergs so dangerous. Now, you may be wondering, "What do icebergs have to do with supply management?" Answer: When you buy something, the priceThe amount you pay for something. you pay is typically just "the tip of the iceberg." Much of the true costThe different cost elements associated with manufacturing and owning a product. is hidden beneath the surface—just like an iceberg.

For example, do you know anyone who got a "great" deal on a car only to get stuck with massive repair bills? Do you think they would have made a different purchase decision if they had known all of the costs upfront? Answer: Almost certainly! To grasp how a better understanding of costs can influence your buying decisions, let's take a closer look at a specific example. Imagine that when you land your dream job you plan to reward yourself with a new car! As an environmentally conscious consumer, you are considering a Honda Accord hybridA car with a gasoline engine and an electric motor.. After all, not only are Hondas reliable but hybrids are also better for the environment. Even more persuasive, you'll save money in gas! Now, ask yourself, "Is this really a good financial decision?"

To find out, you need to calculate the true cost of owning the hybrid. Your first step is to identify all of your relevant costs. Let's assume you plan on driving the car for five years. Figure 10.1 (Panel A) identifies seven costs you will incur. Six are out-of-pocket expenses and one is the depreciation on the purchase price. Other costs might arise. For instance, since hybrids are still "evolving," repair costs might be underestimated. Further, new regulations might require you to pay for disposal of the hybrid battery, which could add thousands to your costs. Panel B shows cost estimates for the comparison between a gas and a hybrid 2015 Accord. Now that you can see "all" of the costs, the savings in gas money don't look quite as attractive. Now, your question is, "Are you willing to pay $2,455 more to be green?"

What is your key takeaway? Answer: Price is not the same as total cost! Therefore, you need to look below the surface to be able to make great purchasing decisions. As a purchasing professional, you need to build the capabilities necessary to make "hidden" costs visible. Then you can consider all the costs in your decision-making, helping your company avoid paying too much for an item. Not only can you reduce total costs but you can also avoid dangerous financial risks. Applying great costing skills and tools to make decisions is an exciting and impactful part of your job. It's also a skill you can use to improve your own living standard. To begin building the skills you need to look beyond the tip of the iceberg, let's identify and discuss some lenses that will help you look beneath the water's surface.