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Total Cost Analysis

Total Cost Analysis. By Brandon Ostler. Agenda. Total Cost Analysis defined Nuts and Bolts Brainstorming Exercise Benefits of Total Cost Analysis How it works Real world example Exercise Summary Readings List. What is Total Cost Analysis?.

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Total Cost Analysis

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  1. Total Cost Analysis By Brandon Ostler

  2. Agenda • Total Cost Analysis defined • Nuts and Bolts • Brainstorming Exercise • Benefits of Total Cost Analysis • How it works • Real world example • Exercise • Summary • Readings List

  3. What is Total Cost Analysis? • Total cost analysis (total cost of ownership) is the sum of the costs related to the acquisition and use of materials, products, or services.

  4. The Nuts and Bolts • Three main components • Acquisition costs • Ownership costs • Post-ownership costs

  5. Common Acquisition Costs • Purchase Price • Planning Costs • Taxes • Financing Costs

  6. Common Ownership Costs • Downtime Costs • Risk Costs • Conversion Costs • Non-Value-Added Costs

  7. Common Post-Ownership Costs • Environmental Costs • Warranty Costs • Product Liability Costs • Customer Dissatisfaction Costs

  8. The Big Picture Post-Ownership Costs Acquisition Costs Ownership Costs Asset Cost Asset Life Cycle

  9. Quick Practice Determine if the following are acquisition, ownership, or post-ownership costs: • Tariffs • Recalled products • Lost Sales • Frequently moving Work-in-process inventory • Contract Determination

  10. Brainstorming Exercise • Why would your organization want to conduct a Total Cost Analysis?

  11. Your firm Service Providers Retailers Manufacturers The end customer Who Benefits?

  12. How It Works • Find each component cost • Sum the cost of the three components • When purchasing, compare total cost from potential suppliers • If for a process, look for ways to reduce total cost

  13. Real World Example • ABC, a retail store, is deciding whether they should implement a new billing system or upgrade their current system. • Both systems are expected to last 3 years and both will need to be un-installed at the end of the third year. • What should they do?

  14. Real World Example

  15. Real World Example

  16. Real World Example New billing system total cost: $11,534,000 Upgrade current system total cost: $9,741,000 ABC should upgrade their current billing system as they will incur the lowest total cost.

  17. Exercise Which supplier has the lowest total cost? Which supplier has the highest cost of post-ownership?

  18. Exercise Answer

  19. Summary • Total Cost Analysis: • Three main cost components • Can bring out the “hidden” costs. • Spotlight the potential cost problems before they become problems • Can be used to find cost savings

  20. Readings List • Steven M Bragg. Cost Reduction Analysis: Tools and Strategies. • Wouters, M. et al. The Adoption Of Total Cost Of Ownership For Sourcing Decisions--A Structural Equations Analysis. • Degraeve, D. et al. The use of total cost of ownership for strategic procurement: a company-wide management information system. • Lisa M. Ellram.Total Cost Of Ownership; An Analysis Approach For Purchasing. • David Burt, et al. Supply Management. Eighth edition. pp 303-320.

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