Tco 2
Tco 2
Tco 2
Volvo,
Wine Barrels,
and a
Vacuum
have in common?
1
Purchase 1998 Volvo V70, T-5 (Sweden) $ 39,000
Discount (6,500)
Sales tax (90-day rule) 0
Delivery to Port Hueneme (6-weeks) 0
Train/taxi to Port Hueneme 60
Luxury tax (10% over 36K) 0
European license/Insurance for 3 months 555
Airfare (Continental miles) 0
Total Cost to take delivery in Göteborg/PH $ 33,115
Purchase 1998 Volvo V70, T-5 (SD, CA) $ 39,000
Discount (2,500)
Sales tax (7.25%) 2,646
Luxury tax (10% over 36K) 50
European insurance for three months 0
Airfare (Continental miles) 0
Total Cost to take delivery in San Diego $ 39,196
Rent equivalent Volvo (Europe) $ 6,000
$ 45,196
2
“Exhausted” white oak red wine barrels
from Temecula winery $ 40 each
Issues:
• Choose and transportconsiderations:
Other ‘soft/indirect’ barrels ½ workday (2 people)
• Number
• Wages of of
barrels in oneand
employees trip lost
(no productivity
min.) 30
• Storage • capacity at PRDH/BMI
Head designer is billable at $90/hr. 30
• Fuel & 17’ box
• Inability to truck
choose(rent) $ 150
barrels at Napa (lower yield?)
Total• Direct
BarrelCost $ 1,350 ($45/barrel)
cost is 20% of direct costs of a chair
• (FYI... white
“Exhausted” Cost ofoaknew barrel
red wineisbarrels
$1,000)
from• Napa
Lackwinery
of storage capacity, as well as personnel
$ 22 to breakdown and
each
Issues: kit barrels, but...
• Establish
• Inspect relationship(s)
and arrange purchase for sustainable sources of supply
3 workdays (2 people)
• Build new business relationships
• Number of barrels in one trip (min.) for marketing
70 barrel furniture
• Enjoy
• Travel road trip...
expenses $ 300
• Other considerations
• Storage capacity at PRDH/BMI ??? 30
• Fuel & tractor semi-trailer (outsource) $ 1,050
Total Direct Cost $ 2,890 ($41/barrel)
3
21 pounds 17 pounds
~ $230 ~ $150 4
All of the decisions involve the
application of (or lack thereof...)
TCO
(Total Cost of Ownership)
Total Ownership Cost – TOC
Total Cost – TC
Total Cost of Operation
Life-cycle Cost (TCO over time)
All-in-Cost
Relevant Cost of Ownership - RCO
5
And now for some academic stuff...
6
What is TCO?
TCO is a Philosophy, Methodology, and Tool for
analyzing all the relevant quantitative and
qualitative costs of an acquisition, project,
investment, or relationship in order to make a
decision...
7
TCO as a philosophy…
TCO looks beyond the purchase price of a part,
subassembly, asset, investment, project, and/or service…
TCO seeks to include all relevant information that will affect
the outcome…
TCO considers qualitative considerations, as well as
quantitative…
TCO seeks to understand short and long-term costs and
benefits (life cycle cost)…
TCO explores customer and/or supplier relationships to
determine their value to the organization…
8
TCO as a Methodology 1
9
TCO as a Methodology 4
Classification of Decisions:
Low Impact – low-cost commodity items
(e.g., copier paper)
e.g., infrequent
purchases,
custom software,
13
TCO as a Tool
Inventory
Non-Delivery
Poor Quality
Transportation and Packaging
Carrying
Working Capital !
Insurance
Property Taxes
Floor Space
Obsolescence/spoilage
Administration
??????
14
TCO as a Tool
Quantitative & Qualitative
ATV Engine
Supplier 1 m inus
Total Cost Analysis (annual) Supplier 2
Supplier 1 Supplier 2
Description formula amount formula amount
Total engine cost 12,000 x $500 6,000,000.00 12,000 x $498 5,976,000.00 24,000.00
Cash discount
n/30 6,000,000 x 0.10 x 30/360 50,000.00 5,976,000 x 0.10 x 30/360 49,800.00
discount available 6,000,000 x (0.10 x (10/360) +0.02) 136,666.67 5,976,000 x (0.10 x (10/360) +0.01) 76,360.00
Largest discount -136,666.67 -76,360.00 (60,306.67)
Tooling Cost given 22,000.00 given 20,000.00 2,000.00
Transportation cost (22,000 lb. LTL) 125 x 12,000 x 22 x $1.20/2000 19,800.00 100 x 12,000 x 22 x $1.20/2000 15,840.00 3,960.00
Ordering cost 12,000/1,000 x $125 1,500.00 12,000/1,000 x $125 1,500.00 0.00
Carrying cost 1,000/2 x $500 x 0.20 50,000.00 1,000/2 x $498 x 0.20 49,800.00 200.00
Quality cost 6,000,000 x 0.02 120,000.00 5,976,000 x 0.03 179,280.00 (59,280.00)
Delivery rating
Back Order (50% ) 12,000 x 0.01 x 0.50 x $15 900.00 12,000 x 0.02 x 0.50 x $15 1,800.00 (900.00)
Lost sales (50% ) 12,000 x 0.01 x 0.50 x $4,500 x 0.18 48,600.00 12,000 x 0.02 x 0.50 x $4,500 x 0.18 97,200.00 (48,600.00)
Supplier 1 Supplier 2
Performance Metrics Weight Rating Final Value Weight Rating Final Value
16
TCO as a Tool
Quantitative
Buy (US) Buy (China)
60,000 60,000
Per unit Annual cost Per unit Annual cost
Unit cost $30.00 $1,800,000 Unit cost $19.50 $1,170,000
Packing cost $0.75 $45,000 Packing cost $2.00 $120,000
Tooling $0.10 $6,000 Inland transport $0.12 $7,200
Freight $0.25 $15,000 Freight forward fee $0.02 $1,200
Ocean transport $2.40 $144,000
Marine Insurance $0.11 $6,600
Wiring Harness US. Port Handling $0.72 $43,200
Customs Duty $0.98 $58,500
Customs broker fees $0.03 $1,800
Savings US Transport $1.86 $111,600
$1.67 or ≈ 5.4% Warehouse Cost $0.50 $30,000
Is it worth the added risk?
Cost of capital $0.71 $42,353
Cost of hedging $0.08 $4,800
Administrative time $0.02 $1,200
Travel $0.33 $20,000
Tooling $0.05 $3,000
Dock to stock
Ship to local warehouse/container 0.0063 250.00 3,000.00 $250/40,000 = $0.00625
Storage 0.0165 0.0014 55.00 660.00 $5.50 x 10 / 40,000 = $0.001375
Warehouse fee 0.0030 120.00 1,440.00 $6 x 20 / 40,000 = $0.003
subtotal 0.0106 425.00 5,100.00 0.4016
Interest on value of average inventory 0.0375 0.0360 1,440.00 17,280.00 $0.401625 x 240,000 x 0.18 / 480,000 = $0.036
Arnold Maltz & Lisa Ellram suggest this modification to the TCO
framework is necessary to account for the extra interface, quality
measurement, and customer satisfaction costs involved in using TCO
analysis in Logistics decision-making.
TCO + Logistics = TCR (total cost of the relationship)
21
TCO as a Tool
Qualitative
Pugh Importance
Requirements/Attributes Baseline Option 1 Option 2 Option 3
Matrix of Need
Quality 5 0 - - -
Cost 8 0 - - -
Supplier Logistics 10 0 - - 0
Development 10 0 0 0 0
Business 10 0 - 0 0
Technology 10 0 + - +
Physical environment 8 0 0 0 0
Human environment 4 0 + + +
OR 4 0 0 0 0
Handling 9 0 + + +
Machine Ride 5 0 0 0 0
Cornering 10 0 + + +
Acceleration 10 0 0 0 0
OR 4 0 0 0 0
Communication 10 0 - - -
Mate Physical persona (looks) 4 0 0 0 0
Spiritual persona (soul) 10 0 0 0 0
OR 10 0 + 0 0
? 10 0 0 + +
151
Sum of positives "+" 0 5 4 5
Sum of sames "0" 19 9 10 11
Sum of negatives "-" 0 5 5 3
Weighted sum of positives 0 43 33 43
Weighted sum of negatives 0 -43 -43 -23
Total weighted sum 0 0 -10 20
22
So...what is TCO – really?
A Way of Thinking…
Understand and concentrate on your core competencies
Direct your focus from tactical to strategic
Be proactive, not reactive
Emphasize total cost, not just purchase price
Understand the qualitative, less tangible issues in a procurement
Measure, so you can manage
Know the Voice of your Customer (VOC)
Develop and align your key performance indicators (KPI’s) with VOC
Gather data to gain knowledge
Truth is not reality, truth is perception (Rey Huerta, President Enterprise Logistics Solutions)
23
Supply Management & TCO
(Adapted from Supply Chain Management, Fawcett/Ellram/Ogden, Ch8)
24
Supply Management & TCO
(Adapted from Supply Chain Management, Fawcett/Ellram/Ogden, Ch8)