CH 11 Total Cost of Ownership
Examples of Opportunity Costs
-Lost sales -Lost productivity -Downtime
Factors to be considering in TCO
-Use for evaluating larger purchases -Obtain senior management buy-in -Work in a team -Focus on big costs first -Obtain realistic estimate of life cycle -Use as a decision making tool -Consider all relevant costs in global sourcing throughout supply chain
4 Broad Categories of TCO Costs
1) Purchase Price 2) Acquisition Costs 3) Usuage Costs 4) End-Of-Life Costs
Cost of next best alternatives
Opportunity Costs
Costs of bringing product to buyer
Acquisition costs- TCO Category
Usage costs
Conversion and support costs- TCO Category
The present value of all costs associated with a product, service, or capital equipment incurred over its expected life.
Definition of Total Cost of Ownership
Net of amounts received/spent at salvage
End-of-life costs- TCO Category
Purchase price
Invoice amount paid to supplier- TCO Category
1) Map process and develop TCO categories 2) Determine cost elements for each category 3) Determine how each cost element is to be measured (metrics) 4) Gather data and quantify costs 5) Develop a cost timeline 6) Bring costs to present value
Steps to building at TCO Model
What requires a purchaser to identify costs beyond the standard unit price, transportation, and tooling when evaluating purchase proposals or supplier performance
Total Cost of Ownership
