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