6-3.2 TCO Estimate

A preliminary estimate of TCO took place during the Develop Preliminary TCO Estimates topic of the Conceptualize Need task of USPS Supplying Practices Process Step 1: Identify Needs. A more complete TCO estimate was calculated in the Update/Refine Total Cost of Ownership Analysis topic of the Prepare Project task of USPS Supplying Practices Process Step 2: Evaluate Sources. The TCO has also been further refined during the following topics in Process Step 2:

As the project reaches the end of its life, the pricing analyst needs to validate the estimated TCO against actual TCO. An actual TCO is based on the costs incurred over the project’s life-cycle. It also incorporates the inputs used for a typical TCO estimate, upgrading them to actual numbers and measures. An actual TCO study assesses the total cost from purchase to the write off of inventory. A reduction in actual TCO from previous comparable projects represents a cost saving for the Postal Service. Net savings is the difference between prior-year spend and current-year spend for the same or comparable products, services, or activities. Savings related to supplier price or market increases do not qualify as cost savings because they do not show up on the bottom line, even though they may qualify as negotiated savings or cost avoidance.

Negotiated saving is the difference between a supplier’s initial proposed price and the final purchase price.

Cost avoidance is the identifiable and measurable elimination of a new cost that would have otherwise occurred except for planned and deliberate SCM actions. Cost avoidance does not qualify as a cost saving because the avoidance has no direct dollar-for-dollar impact on the bottom line. Similarly, avoidance does not qualify as a cost reduction because the avoided cost is a “new” cost and, by definition, not included in prior-year spend. The cost avoidance minimizes or eliminates the negative impact on current or future-year spend, however. Cost avoidance is measured differently than negotiated savings are. Cost avoidance is the difference between the average quoted market price and the price paid, which could be more or less than the initial proposed price.