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8/13/2019 Total Cost of Ownership of Car Models
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PAGE 1
Insert title
1
Presentation on the Total Cost
Of Ownership
Total Cost of Ownership
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PAGE 2
Insert title
210 February 2014
Procurements Six Sourcing Steps
Procurement
PAGE
2
Collect &Analyse
Internal Data
Collect &AnalyseSupply
Market Data
DevelopStrategy
ExecuteStrategy
Implement &Manage
Category
EstablishScope, Team
& Goals
Understand
stakeholderexpectations
Collect spend, volume
& inventory data
Establish spend and
volume forecasts
Collect and review
specifications
Collect & review
contracts Create baseline
Build TCO/TVO
model
Hold internal idea
generation session
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PAGE 3
Insert title
Total Cost of Ownership
Procurement PAGE 3
Initial purchase price
Inventory costs
Running/Operation costs
Purchase process costs
Logistics cost
Over-specification
Warranty
Maintenance costs
Installation costs
Disposal costs
etc
Select suppliers
based on complete
cost picture
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PAGE 4
Insert title
410 February 2014
Why is the TCO Approach Important?
Procurement
PAGE
4
Supplier Selection Facilitates supplier selection
Helps to identify the main cost driversCost Drivers
Full Picture Helps to get a full understanding of all direct and indirect
costs and allows you to budget accordingly
Savings ideas Helps to identify cost areas for improvement
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PAGE 5
Insert title
510 February 2014
What Costs to Consider?
Procurement
PAGE
5
Project management
Administrative costs (order processing/payment)
Transportation costs
Warehousing costs
Installation costs
Operation costs
Maintenance costs
Financing costs
Opportunity costs (yield, throughput, etc.) Specific training costs
Disposal costs
R&D costs
Quality check costs
Purchase price
Inbound freight cost
Insurance premiums
Packaging costs
External costs
Internal costs
Joint costs
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PAGE 6
Insert title
Focus on Total Value of Ownership
Procurement PAGE 6
Total Cost ofOwnership
Less-tangiblebenefits
Valuecreation
+ + Strong supplier
relations
Securing supply inboom periods
Access to suppliersresource capacity
Risk mitigation
Suppliers bestresources
Process optimisation
New technology
Market surveillance
Supplier retention
Purchase price
Transportation
Inventory costs
Running costs
Purchase / process costs
Waste
Logistics systems
Over-specification
Warranty
Induced costs
Future incremental cashflows
Revenue growth
Profitabilityimprovements
Innovative new customersegments
Charge first-moverpricing
Customer & supplierretention
Service differentiation
Working capital changes
Opportunity spotting
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PAGE 7
Insert title
710 February 2014
What is TCO?
The TCO - Total Cost of Ownership is the cost associated to an
item or service during its whole life cycle, from its conception
through its acquisition, use and disposal.
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Insert title
810 February 2014
Presentation of a TCO model
TCO embeds such costs as:
Upstream
costs
Purchasing
price
Administrative
& transportInventory
Carrying cost
Cost related to
Downstream risks
Definition of
requirements
Sourcing
suppliers
Supplier
selection
Supplier
qualification
Product
qualification
Material
Process &
depreciation
Overheads
Supplier
profit
Packaging &
transport
Issuing P.O.
Transport &
insurance
Taxes & duties
Handling
quality inspect.
Payment terms
Opportunity
cost
Insurance cost
Property taxes
Storage cost
Obsolescence &
damage cost
Installation
cost
Maintenance
Warranty
period cost
Non-quality
cost
Cost of
non-delivery
Supplier
management
Cost of use &
re-use
Cost of
recycling
Cost of
disposal
Company
policy costs
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PAGE 9
Insert title
910 February 2014
Upstream costs
Upstream costs occur before the actual buying of the item or
service: such costs are generated during the upstream phases:
The definition of requirements, e.g. the writing of the
specification
The sourcing and the selection of the supplier, e.g. supplier
identification and selection process costs, collection of
information, sending and exploitation of Requests for
Information, etc.
The qualification of the supplier and the product, including
visits and audits of suppliers, additional checking and
controlling steps, etc.
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PAGE 10
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1010 February 2014
Purchasing price
The purchasing price can include:
Material costs
Labor costs
Process and depreciation
Packaging and transportation (if the supplier takes care aboutthe transportation, i.e. the company buys delivered products)
Allocated overheads
Supplier profit
Note: the purchasing price is not necessarily the largest part of
the TCO.
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PAGE 11
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1110 February 2014
Administration and transportation
Administrative costs include:
The costs associated to the issuing and controlling of the
Purchase Order: issuing, controlling invoices, settling litigious
cases, etc.
Costs due to short payment terms (i.e. loss of the financial
opportunities that could have been taken by paying at 60 days
or more)
Handling and incoming inspection costs.
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PAGE 12
Insert title
1210 February 2014
Inventory carrying cost
Inventory carrying costs include:
Opportunity costs: Not a cost in itself, it represents the fact
that the money locked in the inventory is not used for
anything elsefinancial product, value creation, etc.
Insurance costs, property taxes and other duties
Storage costs: Area, equipment, human resources, etc.
Obsolescence and damage costs: Especially when dealing
either with products that cannot be stored for a long time, or
with products used in a short-life-cycled business.
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1310 February 2014
Costs related to downstream risks
The costs associated to the downstream phases include:
Installation costs: Non recurrent costs, linked to the firstutilization of the supplier product or service
Maintenance, spare parts and assistance costs Warranty costs: The associated cost (or saving) due to
different warranty periods: a supplier may offer a 2-yearwarranty for the same price than another one offeringonly 1 year
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1410 February 2014
Costs related to downstream risks
Non-quality costs: Non-quality events can be detected whenreceiving items (costs are linked to the additional quality
inspection, the possible re-work, the sending back of the
items and the possible re-planning of the affected
operations), when using items in operations (costs are linked
to re-work, possible loss of produced items or batches,
possible re-planning of the affected operations), or at the
clients office (include the possible replacement cost, the
repair cost, and the possible liquidated damages that the
client would ask in that case, according to the negotiatedcontract)
14
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1510 February 2014
Costs related to downstream risks
Costs of non-delivery: These correspond to what is spent ifthe supplier does not meet the delivery schedule, i.e. re-
planning due to missing parts, liquidated damages paid to
customers due to consequent delays in operations, etc.
Supplier management costs: These are linked to the contacts
and meetings necessary to manage the relationship with the
supplier, either in normal conditions, or in abnormal
conditions (for instance to solve a technical problem or to
request and control a supplier action plan to meet the
required performance level)
15
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1710 February 2014
When and why to use TCO approach
The TCO approach can be used in several situations where the
buyer wants to have a larger cost approach rather than justthe purchasing price:
Compare different sources of supply, especially in the casewhen suppliers are not similar (e.g. local vs. distant, highquality performing vs. low quality suppliers, etc.)
Compare different technologies or technical solutions: thepurchasing price as well as the associated costs will be totallydifferent for different technologies (e.g. road vs. rail transport)
Identify potential cost reduction areas other than purchasing
price (e.g. reduction of obsolete inventory cost, reduction ofnon-quality and non-delivery costs, etc.)
17
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1810 February 2014
When and why to use TCO approach
Negotiate where purchasing prices are hardly negotiable, suchas monopolistic markets or situations in which suppliers are
imposed (cost reduction opportunities can be found by asking
extra samples, maintenance, spare part etc)
In general for each make or buy decision
The TCO approach provides high visibility to the purchasing
function. The TCO is by nature, cross-functional and better
represents the real cost to the company regardless of the
specific purchasing price.
In any case, the TCO approach provides visibility to the
purchasing function.
18
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1910 February 2014
How to design a TCO model?
1.Objectives & Project team
2.Define the scope
3.Select the key parameters & quantify
4.Identify the main cost elements
5.Validate the model through testing
19
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Insert title
2010 February 2014
TCO Process - Design And Testing
Example
A company considers buying cars for their salespersons. The
general policy not to be modified defines usage periods of
4 years, after which cars are bought back by the supplier. The
supplier proposes two models:
Model 1 is a 1.2 liter petrol engine,
Model 2 is a 2.0 liter diesel engine.
Model 1 has a cheaper purchasing price, but model 2 has a
lower consumption and a cheaper fuel, model 2 is also
supposed to have a longer life, therefore a better resale price
after 4 years.
20
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2110 February 2014
Step 1Define the objectives and the project team
This step consists of defining the decision, which has
to be made out of the TCO calculation. The different
stakeholders affected by the decision have to be
identified and invited to participate (and give theirinput), which will develop the TCO model.
Here the objective is to choose the car model with
the lowest TCO.
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TCO Process - Design And Testing
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2210 February 2014
Step 2Define the scope
This step consists of determining what elements of
costs should be included in the calculation.
If the usage period of the cars were 10 years, the
resale would not have been as interesting as for a 4-year period. The team would probably have chosen
not to include this cost element in the calculation.
The team may also decide not to include the
Upstream Phase costs.
22
TCO Process - Design And Testing
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2310 February 2014
Step 3Select the key parameters and quantify them
For the car, the different elements that have been chosen are:
23
CHARACTERISTICS OF THE 2 MODELS
model 1 model 2
Minimum resale value (% of purchasing price) 10% 15%
Distance to reach resale value (km) 250000 300000
Consumption (liters/100km) 6.1 4.3
Price of fuel (dollars/liter) $1.00 $0.80
Annual maintenance and repair $603.00 $950.00
Annual insurance cost $466.00 $623.00
License (non recurring) $118.00 $147.00
TCO Process - Design And Testing
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2410 February 2014
Step 4Identify the main cost elements
This step consists of identifying and analyzing the main
sources of cost:
The high value elements of the TCO model
The main cost drivers of the elements, i.e. the parameters
that make the cost elements vary, and that may affect the
decision.
By analyzing the different elements of the TCO model, one can
conclude that price, fuel, maintenance, insurance, and resale
will be the most important elements, while the price of the
license can be neglected.
24
TCO Process - Design And Testing
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2610 February 2014
Scenario 1
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GLOBAL PARAMETERS
Number of years 4
Number of km per year 14000
Total distance driven over the period (km) 56000
CALCULATION OF THE TCO
model1 model2
Price $14 500.00 $17 200.00
Fuel $3 416.00 $1 926.40
Maintenance and repair $2 412.00 $3 800.00
Insurance $1 864.00 $2 492.00
License $118.00 $147.00
Resale price $11,576.80 $14,470.93
Total cost over the period $10,733.20 $11,094.47
TCO Process - Design And Testing
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2710 February 2014
Scenario 2
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GLOBAL PARAMETERS
Number of years 4
Number of km per year 17000
Total distance driven over the period (km) 68000
CALCULATION OF THE TCO
model1 model2
Price $14,500.00 $17,200.00
Fuel $4,148.00 $2,339.20
Maintenance and repair $2,412.00 $3,800.00
Insurance $1,864.00 $2,492.00
License $118.00 $147.00
Resale price $10,950.40 $13,886.13
Total cost over the period $12,091.60 $12,092.07
TCO Process - Design And Testing
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2810 February 2014
Scenario 3
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GLOBAL PARAMETERS
Number of years 4
Number of km per year 20000
Total distance driven over the period (km) 80000
CALCULATION OF THE TCO
model1 model2
Price $14,500.00 $17,200.00
Fuel $4,880.00 $2,752.00
Maintenance and repair $2,412.00 $3,800.00
Insurance $1,864.00 $2,492.00
License $118.00 $147.00
Resale price $10,324.00 $13,301.33
Total cost over the period $13,450.00 $13,089.67
TCO Process - Design And Testing
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2910 February 2014
The project teams understands that Model 1 is
the most total cost effective for a driving
distance of 14 000 per year, Model 2 is the
most total cost effective for a driving distanceof 20 000 km per year, and the two models
are equivalent in the intermediate situation, at
a driving distance of 17 000 km per year.
29
TCO Process - Design And Testing
K f t f
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3010 February 2014
Key success factors for
implementation
1. Obtain support from top management2. Question whether you need TCO and in what kind of
purchase it is relevant
3. Create a project team working on TCO
4. Brainstorm and create your own model by taking intoconsideration only elements which are relevant to your
organization
5. Set up the rules
6. Create a common sense system
30
F t b i t th
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3110 February 2014
Frequent barriers to the
implementation of TCO models
1. Internal resistance
2. Purchasing is still measured on price
3. Allocation of budget is done based on price
4. Lack of time & resource
5. Lack of expertise and experience
6. Lack of data
7. Complexity of models
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Conclusion
TCO is not a system which is 100% accurate
The points are to identify the key elements,
the trends and there for to obtain a decision support tool.
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PAGE 33
Insert titleTCO is an approach of analysing multiple
scenarios?
2/10/2014 33
A) True
B) False
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