Presentation is loading. Please wait.

Presentation is loading. Please wait.

Federal Acquisition Service U.S. General Services Administration The Federal Strategic Sourcing Initiative (FSSI) Understanding the Elements of Total Cost.

Similar presentations


Presentation on theme: "Federal Acquisition Service U.S. General Services Administration The Federal Strategic Sourcing Initiative (FSSI) Understanding the Elements of Total Cost."— Presentation transcript:

1 Federal Acquisition Service U.S. General Services Administration The Federal Strategic Sourcing Initiative (FSSI) Understanding the Elements of Total Cost of Operations (TCO)

2 Page 1 Provide a brief overview of strategic sourcing and the Federal Strategic Sourcing Initiative (FSSI) Provide a comprehensive definition of Total Cost of Operations (TCO) Explain the key elements of TCO Clarify the difference between cost elements and cost drivers Present illustrative examples of acquisition decisions based on TCO analysis Share the benefits that can be achieved by incorporating TCO analysis into the procurement process Workshop Objectives

3 Page 2 What is TCO? Total Cost of Ownership The total cost of owning and operating an asset over its expected period of use, i.e., lifecycle cost. Also includes costs to acquire and dispose of the asset Total Cost of Operations Similar to Total Cost of Ownership, but recognizes that certain assets might be leased or provided as part of a contracted operation. Provides a useful cost framework to evaluate: Policy options Business process alternatives Investment alternatives, e.g., in-house vs contract; own vs lease Acquisition alternatives, e.g., vendor vs vendor; contracting options Prelude

4 Page 3 The Federal Strategic Sourcing Initiative is an OMB-initiated program that was established in November of 2005 An OMB memo issued May 2005 required agencies to identify no fewer than three commodities to be purchased through strategic sourcing by October 2005 (excluding software purchased through SmartBUY). The memo stated that: –Agencies needed to leverage spending to the maximum extent possible –Sound business decisions needed to drive spending An OMB memo issued May 2005 required agencies to identify no fewer than three commodities to be purchased through strategic sourcing by October 2005 (excluding software purchased through SmartBUY). The memo stated that: –Agencies needed to leverage spending to the maximum extent possible –Sound business decisions needed to drive spending Federal Strategic Sourcing Initiative (FSSI) In November of 2005, as a direct result of the OMB mandate, FSSI was established with a mission to improve the federal government acquisition value chain, increase socio-economic participation and ultimately lower total cost of operations and/or ownership for strategic sourcing vehicles FSSI is governed by OFPP and the Strategic Sourcing Working Group under the Chief Acquisition Officers Council More than 60 Federal agencies, boards and commissions actively participate in the FSSI Use of FSSI vehicles is non-mandatory, but agencies are encouraged to look at FSSI solutions first Currently, three FSSI vehicles exist with GSA serving as the Executive Agent: Express and Ground Domestic Delivery Services – GSA Schedule 48 BPA Office Supplies – GSA Schedule 75 BPAs Wireless Telecommunications Expense Management (TEM) Services – IDIQ, multiple award contract In November of 2005, as a direct result of the OMB mandate, FSSI was established with a mission to improve the federal government acquisition value chain, increase socio-economic participation and ultimately lower total cost of operations and/or ownership for strategic sourcing vehicles FSSI is governed by OFPP and the Strategic Sourcing Working Group under the Chief Acquisition Officers Council More than 60 Federal agencies, boards and commissions actively participate in the FSSI Use of FSSI vehicles is non-mandatory, but agencies are encouraged to look at FSSI solutions first Currently, three FSSI vehicles exist with GSA serving as the Executive Agent: Express and Ground Domestic Delivery Services – GSA Schedule 48 BPA Office Supplies – GSA Schedule 75 BPAs Wireless Telecommunications Expense Management (TEM) Services – IDIQ, multiple award contract 2005 OMB Mandate

5 Page 4 Strategic sourcing is a process that strives to optimize an organizations supply base while reducing Total Cost of Operations and improving mission delivery Strategic sourcing is the collaborative and structured process of critically analyzing an organizations spending and using this information to make business decisions about acquiring commodities and services more effectively and efficiently A group of senior Federal executives participating in the 2006 Public Sector Strategic Sourcing Roundtable defined strategic sourcing in the federal government as: A Systematic Process for analyzing and developing optimal strategies for buying goods and services A Data Driven Process that relies on fact-based analysis for decision making rather than hunches A Holistic Process that addresses customer needs, market conditions, organizational goals and objectives, and other environmental factors Based on Market Intelligence and takes into account small business capabilities Inclusive of Customer Requirements A Cross-Functional Approach that incorporates the perspectives and expertise of acquisition specialists as well as end users About Supporting an Organizations Mission through procured goods and services About Developing Organization-wide Strategies

6 Page 5 The benefits of strategic sourcing and drivers of TCO are numerous and go far beyond simple reductions in unit costs Primary Benefits of Strategic Sourcing Reduction in Cost Per Unit Change in Consumption/ Volume Improved Operating Efficiency Improved Focus on Socio- economic Goals Pricing Improvements Lower unit price Volume rebates Payment term discounts Supply Chain Savings Cost of capital Warehousing costs Shipping costs Reduced Lifecycle Costs Maintenance costs Operating costs Disposition costs Reduced Procurement- Related Operating Expense Reduced Non-Procurement Related Operating Expense Change in Consumption/ Volume Socio-economic Goals Structured analysis of small/disadvantaged business opportunities PO Processing Accounts Payable Receipt/Warehousing Standardized procurement process Other operating efficiencies Performance Monitoring Structured metrics and periodic review of contractor performance Demand Management Eliminate demand Reduce consumption Encourage substitution Change product mix Specification Review Eliminate gold-plating Simplify specifications Alternative products DRIVERS OF TCO

7 Page 6 What is Total Cost of Operations?

8 Page 7 WHAT IS TOTAL COST OF OPERATIONS? Total Cost of Operations (TCO) is a comprehensive, full cost accounting estimate designed to help consumers and commodity managers assess costs TCO consists of costs incurred throughout the life cycle of a service or commodity, including acquisition, deployment, operation, support and retirement TCO identifies costs which are made up of two major components - direct and indirect: –Direct costs traditionally are made up of labor and capital costs –Indirect costs are more of the soft costs associated with an acquisition and tend to be more difficult to measure and rationalize One of the primary goals of strategic sourcing is the reduction of Total Cost of Operations Understanding TCO broadens our baseline understanding of spend and identifies sourcing opportunities beyond purchase price

9 Page 8 TCO of a commodity goes beyond purchase price, it also includes acquisition costs, lifecycle costs, end of life costs and other TOTAL COST OF OPERATIONS (TCO) ELEMENTS (Conceptual Example) ILLUSTRATION For some commodities, cost elements beyond purchase price may be significant, at times equaling or exceeding initial purchase cost over the commodity lifecycle

10 Page 9 Different commodities can vary significantly in their composition of TCO elements Many buyers will focus on achieving a competitive purchase price and will overlook opportunities to improve other cost elements For some commodities, purchase price is not the largest cost element Therefore, it is important to consider all cost elements, including (but not limited to): Internal procurement, contract management and billing/invoicing processes Internal management of the commodity Operational costs (cost of use, spare parts, maintenance, etc.) Disposal costs Many buyers will focus on achieving a competitive purchase price and will overlook opportunities to improve other cost elements For some commodities, purchase price is not the largest cost element Therefore, it is important to consider all cost elements, including (but not limited to): Internal procurement, contract management and billing/invoicing processes Internal management of the commodity Operational costs (cost of use, spare parts, maintenance, etc.) Disposal costs NOTES TOTAL COST OF OPERATIONS (TCO) ELEMENTS (Conceptual Example) ILLUSTRATION

11 Page 10 Key Elements of Total Cost Analysis: Understanding Cost Elements vs. Cost Drivers

12 Page 11 Understanding the total cost of a commodity involves the identification of cost elements and cost drivers What are they?Examples COST ELEMENTS Components of total cost of operations (TCO) – buckets of cost that can be quantified Transportation costs Purchasing administration costs Inventory costs Supplier certification costs COST DRIVERS Factors or activities that can be changed and have an impact on the magnitude of the cost element Distance shipped Number of suppliers Number of purchase orders Number of different SKUs COST ELEMENTS VS COST DRIVERS Cost drivers can at times be significant sources of savings for some commodities Drivers of cost within suppliers operations can be very important for commodities where unit price is still likely to be the largest component of our total cost Cost drivers can at times be significant sources of savings for some commodities Drivers of cost within suppliers operations can be very important for commodities where unit price is still likely to be the largest component of our total cost

13 Page 12 When identifying the various cost elements of TCO, it is also important to consider the percentage of TCO that is comprised of each the costs elements TCO Element Description Estimated % of TCO Purchase Price & Acquisition Process Costs - Device Hardware includes the actual price paid for the product Lifecycle Costs - Operations and Maintenance Costs Operations and Maintenance costs include maintenance, repair, help desk, asset management, upgrades, licensing, etc. Lifecycle Costs- Consumables Consumables (e.g. paper, ink, toner, cartridge) are a significant part of the office imaging cost NETWORK PRINTER COST COMPONENTS 5%* 50%* 45%* Source: Prudential Equity Group Research, Oct 2006; Lexmark International; Censeo Analysis * Percentages referenced above are based on an industry report from Lexmark International; this break out will not be true in all scenarios – End of Lifecycle Costs are also components that impact the TCO of a network printer, but the estimated percentage was not provided in the referenced industry report For a common piece of office equipment - a network printer – there are multiple TCO components that should be considered when conducting an acquisition. What percentage of the total cost do each of these components make up? The percentage break out of TCO components does not always align with initial assumptions and can impact the results of a total cost analysis

14 Page 13 As demonstrated in the previous example, consumables, maintenance & IT support, and equipment costs are the key cost elements of desktop printers RELEVANT TOTAL COST COMPONENTS Purchase Price: –Hardware: Annual depreciation cost of printers Acquisition Process Costs: –Acquisition: Estimated acquisition costs associated with requirements validation & contracting purchasing activity Lifecycle Costs: –Operations & Maintenance: IT Support: Cost estimate of in-house IT help desk support provided to local and network printers User Support: Cost estimate of work effort associated with toner and paper replenishment performed by users Property Mgmt: Estimated property management personnel costs associated with managing printers –Consumables: Paper and toner costs Power: Estimated power costs associated with devices End of Life Costs: –Disposal: Cost of product disposal at end of life Understanding internal costs related to purchasing and managing a commodity is important in identifying savings opportunities Source: Prudential Equity Group Research, Oct 2006; Lexmark International; Censeo Analysis DESKTOP PRINTER TOTAL COST OF OPERATIONS BREAKDOWN TOTAL COST OF OPERATIONS BREAKDOWN * Percentages referenced above are based on an industry report from Lexmark International; this break out will not be true in all scenarios – End of Lifecycle Costs are also components that impact the TCO of a network printer, but the estimated percentage was not provided in the referenced industry report Purchase Price & Acquisition Process Costs - Device Lifecycle Costs – Operations & Maintenance Lifecycle Costs - Consumables Total Cost of Operations

15 Page 14 Key Elements of Total Cost Analysis: Conducting A Complete TCO Evaluation – In The Workplace

16 Page 15 With most acquisitions, unit price is often the only cost component considered Device ADevice BDevice C Device B&W Printer – medium size Volume 100 Unit Price/Device Cost $1,031.00$783.75$ Source: Censeo analysis $ NETWORK PRINTER COST COMPONENTS Based on the data above, Device C would be the best value

17 Page 16 But to truly obtain best value, it is critical to evaluate all TCO cost components before completing an acquisition Device ADevice BDevice C Device B&W Printer – medium size Usage* 4,000 pg/month Volume 100 Product Support 4-Yr Extended Warranty4-Yr Onsite Warranty4 Yrs Onsite Product Support Purchase PriceDevice $1, (34% of total cost)$ (28% of total cost)$ (19% of total cost) Acquisition Process Costs Procurement $ (5% of total cost) $ (4% of total cost) Lifecycle Costs Est. 4-Yr Consumables Cost $1, (47% of total cost)$1, (46% of total cost)$2, (72% of total cost) 4-Yr Product Support Cost $ (13% of total cost)$ (19% of total cost)$ (4% of total cost) End of Life CostsDisposal $50.00 (2% of total cost) $50.00 (1% of total cost) Total 4-Yr Estimated TCO $3,064.67$2,604.45$3, * Usage estimates are based on avg # users per device (8), typical # of pages per user (500) resulting in the estimated total # of monthly pages (4,000). Projected Consumables Costs assume utilization of high-yield cartridges where available. Source: Censeo analysis $2, NETWORK PRINTER COST COMPONENTS A complete analysis of TCO indicates that Device B truly is the best value solution

18 Page 17 Key Elements of Total Cost Analysis: Conducting A Complete TCO Evaluation – In Daily Life

19 Page 18 The process of conducting a TCO analysis can be applied in everyday life TOTAL COST OF OPERATIONS (TCO) EVALUATION TCO analysis indicates that the cheaper car to buy is actually the more expensive car to own and operate Example A (Non hybrid) Example B (Hybrid) Purchase priceSticker Price: $22,151 Sticker Price: $23,650 Acquisition process and lifecycle costs*: Depreciation Taxes and Fees Insurance Premiums Fuel Maintenance Repairs Interest on Financing Stimulus - Auto Assistance Ownership Amendment $9,981 $1,600 $10,216 $10,700 $3,050 $671 $3,840 $1,500 $10,549 $1,635 $10,216 $5,600 $3,050 $671 $3,953 $1,500 Purchase price after TCO analysis Price: $40,058 (cost is 53 cents per mile to drive)** Price: $35,658 (cost is 48 cents per mile to drive)** *End of Life Costs are not included in this example **Cost of ownership is assumed over a five year period and 15,000 miles a year Source: When purchasing a car consumers often consider only one variable – sticker price – and based on the sticker price in the example to the right, Example A, the non-hybrid is the more economic choice

20 Page 19 Method of Commuting Cost Components Estimated Cost (per day) Total Estimated Commuting Cost (per day) DriveParking Gas $10 $5 (each direction) $20 Public Transportation Fare Parking $3.50 (each direction) $5 $12 Estimated Daily Cost of Commuting When selecting a means of transportation, it is important to understand how different cost drivers can influence the TCO But are these the only cost drivers? Commuting to work is a daily activity for most individuals. In nearly all instances, there are a number of expenses incurred with a daily commute. These expenses will vary based on method of transportation, distance traveled, number of options available, etc. These expenses may also drive us to choose one method of transportation over another. For this exercise, assume that there are only two commuting options available, to drive or to utilize public transportation. Based on the out of pocket expense incurred on a daily basis, lets calculate the cost of a daily commute: Based on an initial assessment, there are multiple cost components that should be considered for both methods of transportation

21 Page 20 In our assessment of the daily cost of commuting, it is important to remember that all costs may not be apparently obvious Method of Transportation DrivePublic Transportation Parking$10$5 Fare$0$3.50 (each direction) Gas$5 (each direction) $3 (each direction) Car Insurance$5.68$5.11 Depreciation of the car$1.69 Maintenance and repair of the car $5.50$4.95 TOTAL$32.87$29.75 Estimated Daily Cost of Commuting In our calculations of the cost of a daily commute, have we considered all costs? Cost Components *Figures for drive method assumed for a 2009 Honda Civic over a five year period and 15,000 miles a year Source: There are a number of additional cost drivers that were not immediately apparent in this example These additional costs can have a significant impact on total cost, and only by assessing all drivers can one truly understand the total cost and make an informed decision between the two alternatives Time is another cost element that was not considered. Time can be assessed as an opportunity cost. Because of limited contracting resources within the government, time is a critical element in any acquisition and cost analysis There are a number of additional cost drivers that were not immediately apparent in this example These additional costs can have a significant impact on total cost, and only by assessing all drivers can one truly understand the total cost and make an informed decision between the two alternatives Time is another cost element that was not considered. Time can be assessed as an opportunity cost. Because of limited contracting resources within the government, time is a critical element in any acquisition and cost analysis NOTES

22 Page 21 Understanding the Benefits of TCO

23 Page 22 Once we understand cost elements and drivers and identify specific actions we can take to impact total cost, savings estimates can be developed to support recommended changes Price Volume Rebates Payment term discounts Cost of Capital Warehousing Costs Shipping costs Maintenance costs Operating, energy and other costs Disposable costs Elimination Substitution Change in mix Cost of processing purchase orders Cost of processing accounts payable Cost of receipt/warehousing Other Operating efficiencies Total Savings Related to Purchased Goods and Services Change in Consumption/ Volume Reduced Lifecycle Costs Reduced Procurement Related Operating Expense Reduced Non- Procurement Operating Expense Reduction in Cost per Unit Improved Operating Efficiency Reduced Supply Chain Costs Reduced Prices SAVINGS CALCULATION FRAMEWORK – TOTAL COSTS Examples

24 Page 23 Understanding TCO and how to apply the concept to acquisition decisions can result in significant savings opportunities, specifically unit cost reduction and planned changes in consumption and volume Unit price reductions can be achieved by: –Negotiating payment terms to gain pricing improvements and discounts –Optimize the supply chain –Reducing lifecycle costs through the management of maintenance costs, operating costs, and disposal costs Planned changes in consumption and volume can be achieved through: –Demand management, eliminating demand and reducing consumption –Specification review, simplifying specifications and suggesting alternative products Unit price reductions can be achieved by: –Negotiating payment terms to gain pricing improvements and discounts –Optimize the supply chain –Reducing lifecycle costs through the management of maintenance costs, operating costs, and disposal costs Planned changes in consumption and volume can be achieved through: –Demand management, eliminating demand and reducing consumption –Specification review, simplifying specifications and suggesting alternative products NOTES The following slide provides an example of how unit price reductions and changes in consumption/volume can result in reduced lifecycle costs and efficiencies

25 Page 24 ROOFING SCENARIOS 20-YEAR LIFETIME COST COMPARISON ($ per SF) In the example below, understanding the TCO elements of lifecycle costs and specification requirements can result in significant cost savings when making an acquisition decision Reduction in Cost per Unit and Lifecycle Costs: –Investing in higher quality materials, workmanship, and warranty coverage upfront will cost more in year one, but will provide the lowest lifetime TCO Change in Consumption/Volume: –For major facility capital investments like HVAC equipment or roofing, clearly identifying and assessing specifications can result in cost savings by reducing consumption (and limiting replacements of parts or full structures) Reduction in Cost per Unit and Lifecycle Costs: –Investing in higher quality materials, workmanship, and warranty coverage upfront will cost more in year one, but will provide the lowest lifetime TCO Change in Consumption/Volume: –For major facility capital investments like HVAC equipment or roofing, clearly identifying and assessing specifications can result in cost savings by reducing consumption (and limiting replacements of parts or full structures) NOTES EXAMPLE Source: Censeo Analysis

26 Page 25 TCO can also help evaluate the benefits of operational decisions such as changes in consumption/volume and improved operating efficiency Change in consumption/volume and improved operating efficiency can be achieved in a number of ways: –Through the implementation of an online ordering system to reduce paper and manual transactions and improve invoice processing and auditing –Business Process re-engineering Change in consumption/volume and improved operating efficiency can be achieved in a number of ways: –Through the implementation of an online ordering system to reduce paper and manual transactions and improve invoice processing and auditing –Business Process re-engineering NOTES The following slides provide an example of how to calculate savings gained through improved operational efficiencies

27 Page 26 Reducing processing times improves operational efficiency 1)Employee walks to copier room to obtain a FedEx letter 2)Employee returns to their desk and clicks on FedEx Online 3)After 3 clicks the label prints out on the employees printer 4)Employee walks back to the copy room to place the outgoing letter in a designated place 5)At a designated time a mailroom employee walks the halls and picks up all out going FedEx packages and mail and returns all to the mailroom 6)FedEx then picks up all outbound shipments All time was studied and this took on average 1 minutes and 22 seconds to complete 1)Employee walks to copier room to obtain a FedEx letter 2)Employee returns to their desk and clicks on FedEx Online 3)After 3 clicks the label prints out on the employees printer 4)Employee walks back to the copy room to place the outgoing letter in a designated place 5)At a designated time a mailroom employee walks the halls and picks up all out going FedEx packages and mail and returns all to the mailroom 6)FedEx then picks up all outbound shipments All time was studied and this took on average 1 minutes and 22 seconds to complete REVISED SHIPPING STEPS IMPROVED OPERATIONAL EFFICIENCY– PROCESSING TIME Shipment of FedEx Packages 1)Employee walks to copier room to obtain FedEx letter and requisition form 2)Employee walks back to their desk to complete the form 3)Employee secures requisition form to the letter with tape 4)Employee walks back to the copy room to place the outgoing letter in a designated place 5)At a designated time a mailroom employee walks the halls and picks up all out going FedEx packages and mail and returns all to the mailroom 6)In the mailroom the mailroom employee keys into a FedEx system the destination address 7)The mailroom employee records the tracking number on the requisition form 8)The form is returned to the original sender 9)The form is secured in a file cabinet 10)FedEx then picks up all outbound shipments All time was studied and this took on average 14 minutes and 42 seconds to complete 1)Employee walks to copier room to obtain FedEx letter and requisition form 2)Employee walks back to their desk to complete the form 3)Employee secures requisition form to the letter with tape 4)Employee walks back to the copy room to place the outgoing letter in a designated place 5)At a designated time a mailroom employee walks the halls and picks up all out going FedEx packages and mail and returns all to the mailroom 6)In the mailroom the mailroom employee keys into a FedEx system the destination address 7)The mailroom employee records the tracking number on the requisition form 8)The form is returned to the original sender 9)The form is secured in a file cabinet 10)FedEx then picks up all outbound shipments All time was studied and this took on average 14 minutes and 42 seconds to complete PREVIOUS SHIPPING STEPS Source: This example is provided courtesy of Federal Express Corporation

28 Page 27 Reduced labor costs is an example of the savings that can be achieved through improved operational efficiency STEP 1: Divide the hourly labor rate of the individual conducting the procurement (based on GS level and pay grade) by 60 min in an hour to generate the estimated labor rate per minute. STEP 2: Next, work with subject matter experts to estimate the current and future processing time of the given transaction and subtract the current time from the future processing time. Then, multiply the variance by the labor rate per minute identified in Step 1. STEP 3: Identify the total number of transactions that are processed per year. Multiply this number by the labor cost savings per unit identified in Step 2. These calculations result in the annual estimated labor rate savings achieved through improved processing time STEP 1: Divide the hourly labor rate of the individual conducting the procurement (based on GS level and pay grade) by 60 min in an hour to generate the estimated labor rate per minute. STEP 2: Next, work with subject matter experts to estimate the current and future processing time of the given transaction and subtract the current time from the future processing time. Then, multiply the variance by the labor rate per minute identified in Step 1. STEP 3: Identify the total number of transactions that are processed per year. Multiply this number by the labor cost savings per unit identified in Step 2. These calculations result in the annual estimated labor rate savings achieved through improved processing time Savings Calculations SAVINGS CALCULATION IMPROVED OPERATIONAL EFFICIENCY– PROCESSING TIME Reduced Labor Costs Associated With Shipment of FedEx Packages Source: This example is provided courtesy of Federal Express Corporation

29 Page 28 STEPS TO CONDUCT A TCO EVALUATION 1)Before beginning any acquisition, through market research or product analysis, identify the key cost elements that comprise the total cost of operations for this commodity – beyond just price 2)Identify the cost drivers for this commodity – which of these can we control/influence? 3)Once the cost elements and drivers have been identified, assess each of these components and assign an estimate percentage of total cost– if the assigned percentage is not significant (falls below 5%) eliminate it from your evaluation 4)Identify the appropriate timeline to measure the total cost of this acquisition 5)With a revised, prioritized list of TCO components, assess the true cost of the commodity 6)Compare and save! There are a number of key steps that should be completed as part of any acquisition to ensure a thorough TCO evaluation has been conducted and best value achieved

30 Page 29 Points of Contact: GSA FAS - FSSI Program Management Office Michel Kareis, PMP FSSI Program Manager (703) FSSI website: FSSI address: Office of Federal Procurement Policy (OFPP) Jack Kelly (202)

31 Page 30 Questions?


Download ppt "Federal Acquisition Service U.S. General Services Administration The Federal Strategic Sourcing Initiative (FSSI) Understanding the Elements of Total Cost."

Similar presentations


Ads by Google