Total Cost Of Ownership (tco) Of Pharmaceutical Products Imported In Eu From Non Eu Markets : A Customer`s Perspective

The existential purpose of any (for-profit) business is sustainable profit, and then there are many derivatives of this master purpose. There are two broad alternatives to increase profit:

Higher sales of "profitable" productsLowering the operating expensesDoing well in either of the alternatives requires a clear view of all the costs of owning a product. Total cost of ownership (TCO) is an age old and ageless model to assess the profitability of a product/ business. With my 6 years of experience in pharmaceutical industry with an exposure to handling the products right from procurement (of finished goods) to sales to customers, I have tried to pen down a comprehensive yet simple list of all the costs, some of which are ignored sometimes while arriving at the TCO. The costs can be divided into 4 major headers:

(These costs are from the point of view of an organization based out of EU which sources finished goods from non EU countries)

Transfer PriceOperating costMiscellaneous costQuality costTransfer Price: This is the price at which the product is bought from the seller. It has five major components:

Material cost (Raw materials and Packing materials)Variable cost (labour , manufacturing overheads etc.)Fixed cost (cost of machinery, other fixed assets etc.)Margins of the sellerRoyalty (if any)Operating costs for the buyer:

Some components of this cost are often ignored:

Cartage to the port of departure (often ignored)Custom clearance at the port of originFreight to destination (One of the biggest components among all the costs, since pharma grade products are shipped temperature controlled. Sea freight is ~6 times cheaper than Air freight)Custom clearance at destination portCartage to the final destination (often ignored, could be up to 20% of the freight cost depending on the location of the warehouse)Inbound (/put away) in the Warehouse (WH) : manual labourStorage cost (calls for maximising the pallet area usage)Pick and pack for outbound shipments (defining optimal MoQs with customers plays a very important part to control these)Spoilage/ Damage (risk is twice as much in Air freight as compared to sea freight)Transport to the customers (clubbing of orders really help here)Miscellaneous costs:

Insurance of goodsRisk of obsolescence (should be done at least on a quarterly basis)Opportunity cost of tied capital in inventoryCost of regulatory filingsThe costs that are underlined make up the inventory holding cost.

Quality linked costs:Shipment of samples to labs (pick and pack + transportation)Batch testing cost (this is often ignored in the TCO and could sometimes be the biggest one among all the other costs)Batch release cost (often as a service offered by a Qualified Person)Keeping a tab on all these would help to understand the total cost incurred in selling a product. An approach to simplify the application of the TCO model is to categorize the products into 4-5 parent categories. These costs can then be allocated to the parent categories instead of each product.