1. TOTAL COST OF OWNERSHIP (TCO)
Chapter 3
TOTAL COST OF OWNERSHIP (TCO)
DOSEN : IR. HOETOMO LEMBITO, MBA, CSLP

2. Objektif Perkuliahan Memahami konsep TCO Memahami fungsi TCO dalam SCM
Memahami keterkaitan konsep TCO dengan aktivitas purchasing management

3. Total Cost of Ownership
Total cost of ownership is a philosophy for really understanding all supply chain related costs of doing business with a particular supplier for a particular good or service (Lisa Ellam, May 1999)
TCO

4. Key Concepts Purchase Price: But One Component of Cost
The Importance of Total Cost of Ownership in Supply Management
Service Providers
Retail
Manufacturing

5. Key Concepts Three Components of Total Cost
Acquisition Costs
Ownerships Costs
Post-Ownership Costs
TCO, Net Present Value Analysis (NPV), and Estimated Costs
Supply Management Action

6. Total Cost and WCSM
To achieve World Class Supply ManagementSM, managers must shift their focus in procuring materials, services and equipment from price to total cost.

7. Importance of TCO Service Providers Retail Manufacturing
Supply Chains/Supply Networks

8. Service and Retail Providers
Understanding what drives the cost of overhead expenditures is crucial to any service business
Revenue must cover the direct costs, material and labor, and overhead in order to generate a profit
TCO analysis of recurring material costs are often overlooked and can yield great savings
TCO analysis of the labor base can reap lower per person costs, greater benefits, and improved morale
TCO analysis of equipment purchases may help reduce the expenditures for maintenance and parts over the lives of the investments

9. Manufacturing
Manufacturers are concerned with all of the same TCO issues as service and retail firms, with some added issues
Issues that are particularly important in cost analysis for manufacturers are:
Direct materials
Manufacturing overhead
Emphasis should be placed on the variance between “should cost” and actual cost.
This should not be confused with price variance

10. Activity Based Costing
A major problem in TCO analysis of manufacturers is accurate allocation of manufacturing overhead
Many manufacturers have used activity-based costing to help improve cost allocation
Activity-based costing (ABC) is a technique for accumulating cost for a given cost object that represents the total and true economic resources required or consumed by the object

11. Supply Chain/ Supply Networks
TCO analysis may include the study of:
Manufacturability
Infrastructure
Outsource decision
Analysis of suppliers beyond tier one
Structure of foreign and domestic tariffs/duties/taxes
Costs of delivery
Foreign regulations
Foreign political/economic stability
Foreign exchange risk
Language/communication requirements
Volatility of end-customer demand
Inventory carrying costs
Inventory risk
Quality costs

12. Three Components of Total Cost
Acquisition Costs
Ownerships Costs
Post-Ownership Costs

13. TCO TCO Components Acquisition costs Ownership costs
Purchase price
Planning costs
Quality costs
Taxes
Financing costs
Ownership costs
Downtime costs
Risk costs
Cycle time costs
Conversion costs
Non-value added costs
Supply chain costs
Post-ownership costs
Environmental costs
Warranty costs
Product liability costs
Customer dissatisfaction costs
TCO

14. Acquisition Costs Purchase Price Planning Costs Quality Costs Taxes
Customs Duties and Tariffs
Regional Trade Agreements
Income-Base Shifting
Financing Costs

15. Ownership Costs Downtime Costs Risk Costs Cycle Time Costs
Conversion Costs
Non-Value Added Costs

16. Ownership Costs Supply Chain Costs Forecasting Administration
Transportation
Inventory
Manufacturing
Customer service
Supplier selection/relationships
Global sourcing

17. Post - Ownership Costs Environmental Costs Warranty Costs
Product Liability Costs
Customer Dissatisfaction Costs

18. TCO, Net Present Value Analysis (NPV), and Estimated Costs
NPV analysis is frequently incorporated into TCO analyses
NPV analyzes present values of the initial expenditure along with the likely future revenue and expenditure streams
The present value of a sum of future cash flows discounted by a required rate of return
NPV greater than zero suggests accepting the investment
NPV less than 0 suggests rejecting the investment
NPV = 0 is the point of indifference

19. Major Categories for the Components of TCO
Total Cost of Ownership
Pretransaction Components
Identifying need
Investigating sources
Qualifying sources
Adding supplier to internal systems
Educating:
Supplier ins firm’s operations
Firm in supplier’s operations
Transaction Components
Price
Order placement/preparation
Delivery/transportation
Tariffs/duties
Billing/payment
Inspection
Return of parts
Follow-up and correction
Posttransaction Components
Line fallout
Defective finished goods rejected before sale
Field failures
Repair/replacement in field
Customer goodwill/reputation of firm
Cost of repair parts
Cost of maintenance and repairs
Source: Lisa Ellram, “Total Cost of Ownership: Elements and Implementation,” International Journal of Purchasing
and Materials Management, Winter 1993.

20. Tangential Reprographics Example

21. TCO = A + P.V.  (Ti + Oi + Mi – Sn)
TCO Formula n
TCO = A + P.V.  (Ti + Oi + Mi – Sn)
i = 1
A = delivered acquisition cost
P.V. = net present value
Ti = training costs in year i
Oi = operating costs in year i
Mi = maintenance costs in year i
Sn = salvage value in year n

22. PVA Incorporated into a TCO Analysis
Acquisition Cost =
$120,000
PV Cash Outflows, yrs =
23,279
PV of overhaul in yr 3 =
5,208
PV of salvage value in year 6 =
(2,512)
TCO =
$145,975

23. PVA Formulas PVAnnuity = CF [ 1/r – 1/r(1+r)t ] PV = FV / (1 + r)t
CF = periodic cash inflow or outflow (must be the same each period)
r = discount rate per period (annual rate divided by the number of periods in one year)
t = total number of periods
PV = FV / (1 + r)t
FV = future value of single cash inflow or outflow

24. Concluding Remarks TCO is an analytical tool and a philosophy
Accurate estimation of total costs requires a cross-functional approach
Supply management is a critical member of such a cross-functional approach
TCO is also applicable in one’s private life enabling better decision-making