total cost of ownership of car models

8/13/2019 Total Cost of Ownership of Car Models

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Presentation on the Total Cost

Of Ownership

Total Cost of Ownership


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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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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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410 February 2014

Why is the TCO Approach Important?

Procurement

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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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510 February 2014

What Costs to Consider?

Procurement

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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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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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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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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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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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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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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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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


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)

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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)

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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.)

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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.

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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

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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.

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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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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.

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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:

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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



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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.

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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



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2710 February 2014

Scenario 2

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GLOBAL PARAMETERS

Number of years 4




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




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2810 February 2014

Scenario 3

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GLOBAL PARAMETERS

Number of years 4




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




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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.

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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

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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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3210 February 2014

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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Insert titleTCO is an approach of analysing multiple

scenarios?

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A) True

B) False

total cost of ownership of car models

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