Once the preliminary cost of the need is defined, opportunities for improvement can be identified.
TCO = P + Present Value of (O + T + M + W + E — S)
where:
P = Purchase costs.
O = Operating costs.
T = Training costs.
M = Maintenance costs.
W = Warehousing and distribution costs.
E = Environmental costs.
S = Salvage value.
TCO is broken down by its component costs, which provide a basis for prioritizing improvement areas. For example; if a major portion of the TCO is the purchase of the need, sourcing or substitution may be the lever implemented to reduce costs. If warehousing is a major cost driver, reducing cycle time may be the most effective lever to implement cost reductions. Additional discussions of TCO can be found in the Sections 1-7, Develop Preliminary TCO Estimates, 2-3, Update/Refine Total Cost of Ownership Analysis, and 6-3, Evaluate and Analyze Actual TCO.
