Supplying Principles and Practices > USPS Supplying Practices Process Step 2: Evaluate Sources > Update/Refine Total Cost of Ownership (TCO) Analysis

Update/Refine Total Cost of Ownership (TCO) Analysis

Total cost of ownership (TCO) refers to the total cost incurred over the life cycle of an item, encompassing purchase, use, maintenance, support, and disposal. A TCO analysis exposes the hidden costs easily overlooked during budget planning or when making purchase decisions. As a result, it becomes possible to yield higher savings by optimizing relevant cost elements.

Estimating the TCO is not a one-time event; accuracy and inclusion must be maintained throughout the life cycle. Preliminary estimates are required when determining whether a project is feasible in terms of a make vs. buy decision analysis. However, preliminary estimates are the most difficult to obtain and the least accurate because very little detail is known in the early stages of the life cycle. A preliminary estimate of TCO took place during Process Step 1: Identify Needs. A more complete TCO estimate must be calculated in Process Step 2: Evaluate Sources.

The TCO estimate should be at or below the funding objective established during Assess Resources activities of the Conceptualize Need task of Process Step 1: Identify Needs for the project to be sustainable. Otherwise, the Purchase/SCM Team should revisit the requirement and the request for proposals (RFP) documentation to make appropriate adjustments.

When adjusting cost estimates, prior activities provide valuable input for cost estimation. Prior activities may exhibit cost needs across business areas and functions and may also identify external costs that may have a bearing on the TCO. The quality and detail of the input have a significant bearing on the resultant quality of the TCO estimate.

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

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

Where:

A = 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 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

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 Process Step 2: Evaluate Sources.

Other Topics Considered

Determine Preliminary Total Cost of Ownership (TCO) Estimate topic, Conceptualize Need task, Process Step 1: Identify Needs

Assess Resources topic, Conceptualize Need task, Process Step 1: Identify Needs

Revisit/Update Resource Assessment topic, Decide on Make vs. Buy task, Process Step 1: Identify Needs

Formulate Project Budget and Request Funding topic, Prepare Project task, Process Step 2: Evaluate Sources