What do a Volvo , Wine Barrels , and a Vacuum have in common?

1. What do a Volvo, Wine Barrels, and a Vacuum have in common?

2. $ 6,081/$12,081 difference and a GREAT trip!

3. Other ‘soft/indirect’ considerations: • Wages of employees and lost productivity • Head designer is billable at $90/hr. • Inability to choose barrels at Napa (lower yield?) • Barrel cost is 20% of direct costs of a chair • (FYI... Cost of new barrel is $1,000) • Lack of storage capacity, as well as personnel to breakdown and kit barrels, but... • Establish relationship(s) for sustainable sources of supply • Build new business relationships for marketing barrel furniture • Enjoy road trip... • Other considerations ???

4. 21 pounds ~ $230 17 pounds ~ $150

5. All of the decisions involve the application of (or lack thereof...) TCO (Total Cost of Ownership) Total Ownership Cost – TOCTotal Cost – TC Total Cost of OperationLife-cycle Cost (TCO over time)All-in-CostRelevant Cost of Ownership - RCO

6. And now for some academic stuff...

7. What is TCO? TCO is a Philosophy, Methodology, and Tool for analyzing all the relevantquantitative and qualitative costs of an acquisition, project, investment, or relationship in order to make a decision...

8. 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…

9. TCO as a Methodology1 • A TCO analysisattempts to determine the type of buy, then applies certain processes and analytical tools to support the decision process. In general, TCO considers quantitative and qualitative • Acquisition Costs • Ownership Costs • Post Ownership Costs

10. TCO as a Methodology4 • Classification of Decisions: • Low Impact – low-cost commodity items (e.g., copier paper) • Leverage – large purchases of items in competitive markets (e.g., disk drives) • Strategic Item – large purchases from important suppliers (e.g., commercial airline jet engines) • Critical Projects – large dollar volume infrequent purchase (e.g., production facilities using various technologies/processes) 1Adapted from Supply Chain Management, Fawcett/Ellram/Ogden, Ch8

11. TCO as a Methodology4 Apply TCO to appropriate buy1 e.g., commodity items, supplier A v. B, domestic v. offshore e.g., alternative SC configurations, LCD v. Plasma, Important supplier relationships Don’t waste a lot of time here e.g., infrequent purchases, custom software, 1Adapted from Supply Chain Management, Fawcett/Ellram/Ogden, Ch8

12. TCO as a Methodology4 • Many qualitative considerations can actually be quantified by careful analysis • There is a TCO issue in performing a TCO analysis. The cost/benefit relationship needs to be analyzed before committing the time and resources • Garbage in, garbage out – care must be taken when determining what and how to measure • Management’s concern is the effect of the TCO object/decision on the bottom line! • TCO takes the emphasis off generic cost reduction initiatives to support the strategic contributions of supply management

13. TCO as a Tool • TCO and Direct Materials, Direct Labor, and Overhead • TCO and Services • TCO and Inventory • TCO and Capital Equipment • TCO and NPV (net present value) Analysis • TCO and International Sourcing • TCO and the Logistics process • TCO and Qualitative Considerations • TCO and MRO, Production/Operations, Services • TCO and Supply Chain Optimization

14. Inventory • Non-Delivery • Poor Quality • Transportation and Packaging • Carrying • Working Capital ! • Insurance • Property Taxes • Floor Space • Obsolescence/spoilage • Administration • ?????? TCO as a Tool

15. Handout #1 TCO as a Tool Quantitative & Qualitative Principles of Supply Chain Management 3e (Wisner. et al.)

16. Handout #2 TCO as a Tool Quantitative maint.

17. Handout #3 TCO as a Tool Quantitative Wiring Harness Savings $1.67 or ≈ 5.4% Is it worth the added risk? Purchasing and Supply Chain Management 4e (Monczka, et al.)

18. TCO as a Tool Adapted from Purchasing and Supply Chain Management 4e (Monczka, et al.)

19. Handout #4 TCO as a Tool Quantitative Guava Puree Purchasing and Supply Chain Management 3e (Monczka, et al.)

20. Handout #5 TCO as a Tool Quantitative Slide provided by Rey Huerta, President of Enterprise Logistics Solutions Zero-Based Theoretical Analysis

21. Arnold Maltz& Lisa Ellramsuggest this modification to the TCO framework is necessary to account for the extrainterface, quality measurement, and customer satisfaction costs involved in using TCO analysis in Logistics decision-making. TCO + Logistics = TCR (total cost of the relationship)

22. Handout #6 TCO as a Tool Qualitative Example: for Option 3 Weighted Sum of “+” = 10+4+9+10+10 = 43 Weighted Sum of “-” = 5+8+10 = -23 Total Weighted Sum 20

23. 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)

24. Supply Management & TCO • (Adapted from Supply Chain Management, Fawcett/Ellram/Ogden, Ch8) • Candidates for TCO analysis • Large dollar spend items • Regular purchases requiring cost information • Procurements with significant unrecognized transaction costs • When purchasing can impact transactions costs, via negotiation, changing suppliers, and/or improving internal operations. • When there is a desire for cross-functional involvement in understanding item or service cost structure • Capital purchases • Value network optimization

25. Supply Management & TCO • (Adapted from Supply Chain Management, Fawcett/Ellram/Ogden, Ch8) • Reasons for TCO analysis • Performance measurement • Framework for cost analysis • Benchmarking performance • More informed decision making • Communication of cost issues internally and with suppliers • Encourages cross-functional interaction • Support external teams with suppliers • Better insight/understanding of cost drivers • Build a business case • Support an outsourcing analysis • Support continuous improvement • Helps identify cost savings opportunities • Prioritize/focus your time on high potential opportunities

26. Would all of these benefit from TCO analysis? • Study for advance degree, continue working, or both • Buy a vehicle (new v. used, compact v. small SUV, …) • Lease v. buy • Rent v. own • Investment A v. B • Adjustable rate mortgage v. fixed rate • 747-8 v. A-380 • Vacation options (Egypt v. Japan?) • Drive v. Fly • Make v. Buy • Project A v. Project B. • Supplier A v. Supplier B, or both • Production Process A v. B v. C • Remain in a bad marriage v. divorce • Cloud based software v. computer resident • Obama v. Romney economic plans

27. I wonder if a TCO mindset would have been beneficial in this situation ?