2-3.3 TCO Formula

The TCO formula laid out in USPS Supplying Practices Process Step 1: Identify Needs still applies:

TCO = P + Present Value of (O + T + M + W + E — S)

Where:

P = Purchase costs; purchase price of a product or service.

O = Operating costs; costs to run a product or service.

T = Training costs; costs to train users.

M = Maintenance costs; costs to maintain the product or support the service.

W = Warehousing and distribution costs.

E = Environmental costs; costs to upgrade to environmentally friendly standards.

S = Salvage value; costs to scrap the product or service at the end of its useful life.

During the Prepare Project task of USPS Supplying Practices Process Step 2: Evaluate Sources, it is essential to analyze and adjust the cost element against newly acquired information since the development of the preliminary TCO estimate. Figure 2.1 summarizes the possible cost elements and potential sources.

Figure 2.1

Cost Elements and Potential Sources

 

Cost

Source of Reference

RFI

Unsolicited Proposal

Item Purchase History

RFP, SOO, SOW, Specifications, and Product Description

Project Plan

Resource Assessment

Logistics Support Plan

Business Justification

Purchase

 

 

 

Operating

 

 

 

Training

 

 

 

 

Maintenance

 

 

 

Warehousing and Distribution

 

 

 

 

Environmental

 

 

 

 

 

Salvage

 

 

 

 

 

If the updated TCO exceeds funding objectives, the purchase/SCM team should adjust the requirement or obtain additional funding from the client to ensure that objectives become financially feasible. Such analysis and adjustment should take place before proceeding to the Formulate Project Budget and Request Funding topic of the Prepare Project task of USPS Supplying Practices Process Step 2: Evaluate Sources.