Total Cost Of Ownership - Iscsglobal
Total Cost of OwnershipTotal cost of ownership (TCO) is an assessment of all costs, directand indirect, involved with an item over the useful life of that item.Most frequently, TCO is used at the beginning of the purchaseprocess to evaluate which is the most cost-effective choice. WhenTCO is calculated at the time the selection decision is being made,many of the included costs are estimated, because they have not yetbeen incurred.Calculating the total cost of ownership can give an organization moredetailed information with which to make the purchasing decision.Most purchasers know that quoted purchase price is not the only costinvolved in obtaining and using an item. Inclusion of all other knowncost factors allows a more complete picture to emerge.Note: The total cost of ownership can be applied to the cost of anypurchase. In "a manufacturing environment it is most commonlyapplied to the purchase of inventory and MRO (maintenance, repair,and operating) materials". In the service industry environment, TCOis often applied to the purchase of any supply item or capitalpurchase. Those working in service industries should readily be ableto use and adapt the information and calculations detailed in thisissue of NAPM InfoEdge to their own particular requirements.Know What to IncludeMany cost factors are known to end users or to others in theorganization and may not be known to purchasing. A completepicture of the total cost of ownership can be compiled through a teameffort that includes, at a minimum, purchasing plus the end users,your technical experts, and finance. Other departments orrepresentatives may be included, such as legal, production, supplymanagement, transportation, and import/export, depending on thepurchase being made. It is important that all involved parties have thechance to participate in order to obtain a useful result.Note: In smaller organizations where it is not practical to form a team,gather the necessary information from individuals in functions
indicated above. Get as much information and assistance as youneed to make the TCO decision.Establish a Framework and Define AssumptionsAt the beginning of the process of determining the total costof ownership, establish a framework and define theassumptions that will guide the work, including: Definition of what is needed and who will use itEstimate of how long the item will be in useAssumptions for quantities or usage rateDefinition of the process for defining the areas of cost to beincludedDefinition of the process for calculating cost figures for theseareasEstimates of the costs for all involved areas of the business(such as the cost of carrying inventory, if the item is aninventory item)Separate Inventory from Capital PurchasesThe areas of cost will be different for inventory items versus capitalequipment. Inventoried items are of lower dollar value per unit, andthere are usually many units involved. Inventory items also aremoving through the business; they are being regularly turned over.Capital equipment is stationary and may be in place for a long time.Typical areas included in the total cost of ownership for each of theseinclude:Inventory Cost of non-deliveryCost of non-qualityCost of transportation and packagingCost of carrying inventoryProduction-related costsAdministration costs per part numberAvailability/flexibilityTechnical assistanceCapital Equipment
Structure of payments over timeEstimated useful life of new equipmentTrade-in value of old equipmentResidual trade-in value of new equipmentCost of site modificationPacking and crating costsCost of transportationCost of rigging and installationTechnical assistance at start-upOperator trainingCost of service and maintenanceCost of supplies and spare partsIn addition to cost factors for inventory and for capital equipmentpurchases, another set of cost factors applies to any purchase from aforeign source. These factors include: Cost of packaging/crating for international shippingTransportation to seller’s portPort-of-origin handling costsExport taxes and fees assessed by the government of originCertificate of inspectionOcean shipping costsMarine insurance premiumsPort-of-entry handling costsCustoms brokerage feesCustoms dutiesInland transportation costsFinancial transaction charges (such as bank charges for lettersof credit)Currency fluctuation/hedgingCommunications expenses (international telephone, fax,postage)Additional levels of inventoryIncreased administration and legal timeMetrication costs (English-metric conversion)Cost of translation, if neededTravel expenses, if needed
Understand the Basis for CalculationUsually, TCO data is used to better select suppliers or items to bepurchased. If you are using your calculations to make relativecomparisons between supplier A and supplier B or item X and item Y,you can be somewhat freer in determining costs. Estimates areacceptable as long as they provide a valid basis for comparison. Twocriteria are important in calculating relative costs:1. The formula makes sense. It is relevant to the factor valued andcan be calculated.2. The formula can be applied across suppliers and used to validlydifferentiate them (see box on page 6).If you are using the total cost of ownership to make capital allocationdecisions, there will be more stringent restrictions on yourassumptions and more urgency to use only verifiable dollar figures.Your numbers may be required to be absolutely accurate, not justrelatively accurate.The degree to which you can use relative versus absolute cost datashould be defined as one of your starting assumptions. For example,determine if your organization will accept relative data, such asdelivery performance measurements, as a valid cost factor eventhough you may not know the exact cost of a missed delivery. If so,then include relative data in your assumptions.If your organization is reluctant to accept nonmonetary factors, thencalculate both sets of factors and subtotal them separately so that thedifference between each is clear. Ask anyone skeptical of the processif he or she will accept that these issues are costing the organizationmoney (most people will agree to this proposition).Then ask whether or not it is better to be approximately right byincluding estimates or relative numbers or absolutely wrong byomitting these cost factors altogether.Ownership costs can be divided into three categories: incurred costs,performance factors, and policy factors. Incurred costs. These are either known or can be estimated toa reasonable degree of accuracy. Incurred costs include areas
such as transportation costs, spare parts and supplies, quotedprice, brokerage fees, and customs duties.Performance factors. These include areas such as deliveryperformance, quality, and requirements for service ormaintenance. Performance factors are relative data. As long asthe data is valid for relative comparison, it is less important thatit be an absolute cost figure.Policy factors. These encompass all issues your organizationchooses to incorporate to reflect business or social policydirectives. Typically a supplier or item either does or does notmeet the policy criteria. The factor is a yes/no factor, andestablishing a dollar value for it rests with the policy makerswithin your organization. Issues such as recycled content ofmaterials, minority and women-owned suppliers, andconsensual reciprocity fall into this category.For social policy factors, and other so-called "soft issues," thequestion the organization must answer is, "How much more would webe willing to pay for the privilege (or issue) being considered?" Youcan include any soft issue in TCO as long as you are willing to put avalue on it. Your value can be arbitrary, as long as it is consistentacross suppliers and its relative weight makes sense to you.TCO Calculation in Five Easy StepsHere are the steps to determining totalcost of ownership:1. Form a team (or gather data fromothers) that includes purchasing,the end users, technical experts,and finance. Add others asappropriate.2. Define the ground rules for theprocess and your assumptions.3. Define the areas of cost, bothcurrent and anticipated, relevant tothe purchase.4. Determine reasonable methods* forcalculating the costs.
5. Add all the relevant costs.Make your decisions based on yourcalculations of total cost.* "Reasonable" is a relative term. It isintended to provide latitude within theTCO process. You should be able tocreate your own methods for calculatingcost factors. This requires examining allthe issues involved in your TCO decisionand deciding which method(s) are mostappropriate for you. All of thecalculations in this issue of NAPMInfoEdge are examples, and reflect thisprinciple.REASONS TO IMPLEMENT TCOSome of the many reasons to implementTCO are to: Institute a "best practice" (movingtoward a systems approach)Analyze the impact of changeSupport the assumption that lowestprice does not always realize thebest resultImprove quality, information flow,decision making, and/or thebusiness processObtain best value for customersImprove competition byunderstanding what drives costJustify changing suppliers Source:Total Cost Modeling in Purchasing,Center for Advanced Purchasing
Studies, 2004HOW TCO SUPPORTS THEORGANIZATIONTCO should fit into the goals of theorganization in its entirety. TCO can furtherthese goals by: Supporting an overall total qualityfocusAiding the purchasing function’s effortsto improve purchasing processesHelping define the organization’sreengineering needsIncreasing competitiveness byencouraging the purchase of “bestvalue” items, and reducing costsProviding access to supplier TCO datato all who work with suppliersFreeing up purchasing to work with theorganization’s more strategicobjectivesSource: Total Cost Modeling in Purchasing,Center for Advanced Purchasing Studies,2004
British Petroleum Exploration: A CaseStudyMRO (maintenance, repair, and operatingsupplies) is fertile ground for TCO. Mostitems in this category are expensed, andtotal dollar spending is often significant.MRO is also a prime area for includingthe cost of doing business (including thecosts of transactions) because there aremany ways to set up resupply systems toreduce these costs. Activity-basedcosting includes methods fordetermining the actual cost of work,including the administrative process. Ifyour organization uses activity-basedcosting methods, then the transactioncosts will be readily available and can beincluded in the TCO calculations.British Petroleum Exploration (Alaska)used activity-based costing methods todetermine the total cost of their MROprocurement process from acquisitionthrough payment. The organizationwanted to find more cost-effectivemethods of procurement and wanted aninternal sales tool to help justify theirintegrated supply program. They werealso interested in benchmarking theirresults against those of other similaroperations. Some cost factors werealready established within theiraccounting practices. The costs ofcapital, taxes, and obsolescence wereextracted from financial data.To determine internal administrationcosts using activity-based costing
methods, they:1. Used a team to define the tasks andestablish the process flow2. Identified what percentage ofpeople’s time these tasks occupied(for MRO only)3. Allocated a percentage of eacharea’s budget corresponding to thepercentage of people’s timeconsumedBy the end of their analysis, they hadidentified the following areas of cost andthe percentages of resources eachconsumed:1. Cost of capital 8.11% of inventoryvalue2. Property taxes 1.45% of inventoryvalue3. Obsolescence 3.20% of inventoryvalue4. Electronic materials requisition1.52% of area budget5. Manual orders 1.77% of area budget6. Purchasing process 14.06% of areabudget7. Inbound logistics 11.54% of areabudget8. Delivery 1.78% of area budget9. Receiving/issuing 8.88% of areabudget10.Storage/surplus 22.40% ofarea budget11.Invoice processing 5.98% ofarea budget12.Administration/supervision5.64% of area budget
Their analysis revealed that for everydollar spent for MRO materials, anadditional 73 cents was spent for theresources and administrative expensesrequired to support the purchase, plus 13cents spent to pay additional costs ofinventory. This data gave them theinformation they needed to educate theirinternal customers and elicit support forconversion to a more integrated supplyprocess. They were also able to comparethe effectiveness of their operations withthat of other companies in the same field.
Total Cost of Ownership Total cost of ownership (TCO) is an assessment of all costs, direct and indirect, involved with an item over the useful life of that item. Most frequently, TCO is used at the beginning of the purchase process to evaluate which is the most cost-effective choice. When
Total Cost of Ownership (TCO) summary Sample Report for Data Center Migration . Total cost of maintaining server(s) over 3 year(s) 2,652,375 Total hardware costs over 3 year(s) 11,493,625 Software cost Virtual Machine Costs Cost of Windows Data Center license per 2 Proc, 32
z find out total fixed cost, total variable cost, average fixed cost, average variable cost, average total cost and marginal cost. 18.1 DEFINITION OF COST AND COST FUNCTION Cost is defined as the expenditure incurred by a firm or producer to purchase or hire factors of production in order to produce a product. As you know, factors of
Total Costs of Ownership Calculations and Worksheets by Building 2. After filling in the necessary values, go to the Results tab to see a graphical comparison of the two adoption approaches in terms of cumulative cost. This Total Cost of Ownership (TCO) calculator provides enterprises with a framework for comparing the cost of building a new .
Total Cost of Ownership (TCO) within IT could allow companies to more accurately budget their future costs (Smith, 2002). In this report, we use the term Total Cost of Ownership to refer to the direct and indirect costs of applications used to support lines of business. This description of TCO provides a balanced approach to emphasizing both the
One approach is to divide your total cost into six distinct components. Figure 1 illustrates this idea. Figure 1: Determining RPA’s total cost of ownership requires considering several different things. The six components are the following: The cost of purchasing your RPA software. The cost of creating your initial automated processes.
The total cost of owning any boiler is determined by more than the initial equipment cost. Total cost of ownership includes operating, maintenance, unplanned downtime, and years of service. When an external burner is preferred, the CBJT model offers the lowest total cost of ownership for this style burner and boiler combination.
Global Automotive TCO Program ICE vs. EV for US, EU and AP region to start with US first, followed by EU and then AP. Project scope outline, focus outlines for EU and AP will be established for those regions in the future: The total cost of ownership program for North America will focus on the understanding automotive cost of ownership in the US of
Asset Management Sector Report 1. This is a report for the House of Commons Committee on Exiting the European Union following the motion passed at the Opposition Day debate on 1 November, which called on the Government to provide the Committee with impact assessments arising from the sectoral analysis it has conducted with regards to the list of 58 sectors referred to in the answer of 26 June .
