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CHAPTER 6
TOTAL COST OF OWNERSHIP (TCO)
to develop total cost models that have many external assumptions as this can
make the model highly suspect.
A fourth data category is possible here: data that are absent from a total cost
model. The challenge with any cost model is that, at times, the cost to collect
data outweighs the value of the data. At other times the sheer number of possible
cost elements that could be part of the model becomes overwhelming. While this
could never be said about product or service quality, close enough is probably
good enough as it relates to total cost models.
Regardless of the type of cost model used, it is important to understand the
data that are populating the model. Relying on a model that includes data based
largely on assumptions is not a good idea. In this case, supply managers may
make decisions based on data that fall largely at the bottom of the reliability
scale. Like forecasting models, total cost models usually arrive at some number
to report in the way of total cost. The question becomes how confident could the
buyer be of the accuracy of the output. While beyond the scope of this book,
sophisticated statistical techniques are available that help identify confidence
intervals around total cost estimates.
6.4.2 SPECIFIC TOTAL COST ELEMENTS
Research has revealed that there are multiple cost categories and elements
that can make up total cost measurement systems. This issue becomes more
complex once it is accepted that different types of cost models exist. It is easy
to see that models that attempt to measure cost elements from point of origin to
final point of consumption at the customer (end-to-end models) can be broad.
One way to approach this issue is to present the cost elements that are most
likely to be included in total cost models. Figure 6.2 illustrates the various key
cost elements. A variety of elements is included in total cost models. Literally
dozens of cost elements could populate a total cost model, particularly those that
relate to international transactions. Secondly, except for price and transportation
costs, no clear consensus exists regarding the elements to include.
As they apply to total landed cost models, cost elements are often divided into
categories that reflect a logical progression of material through the supply chain.
The following illustrates these categories along with examples of costs that fall
within each category:
• Within country of manufacture: Materials, storage, labour, quality, overhead,
obsolescence, packaging, risk or disruption, exchange rates, inventory
carrying charges.
• In transit to country of sale: Transportation charges, fuel surcharges,
insurance, port charges, handling, security, banking fees, broker fees,
potential detention charges, duties, handling agency charges, inventory
carrying charges.