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Supplying Principles and Practices > USPS Supplying Practices Process Step 6: End of Life > Evaluate and Analyze Actual TCO
Evaluate and Analyze Actual TCO
Total cost of ownership (TCO) refers to the total cost incurred over the life
cycle of an item, encompassing development, 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 throughout the entire project life cycle versus by individual supply
chain management (SCM) step.
A preliminary estimate of TCO took place during the Develop Preliminary
Total Cost of Ownership Estimates topic of the Conceptualize Need task of
Process Step 1: Identify Needs. A more complete TCO estimate was
calculated in the Update/Refine Total Cost of Ownership (TCO) Analysis topic
of the Prepare Project task of Process Step 2: Evaluate Sources. The TCO
has also been further refined during the following topics in Process Step 2:
Evaluate Sources:
• Conduct Should-Cost Analysis topic of the Collect Ideas and
Build Fact Base task
• Develop Switching Cost Analysis topic of the Develop Sourcing
Strategy task
• Review and Finalize Request for Proposals (RFP) topic of the
Perform Solicitation-Related Activities task
• Conduct Price/Cost Analysis topic of the Evaluate Proposals task
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.
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:
P = Purchase costs
O = Operating costs
T = Training costs
M = Maintenance costs
W = Warehousing and distribution costs
E = Environmental costs
S = Salvage value
A financial review, conducted at contract closeout, determines whether all
invoices are paid and whether the actual expenditures matched the planned
budget. The review will provide actual cost figures to the cost items that make
up the actual TCO value. Invoices and payment are explained, in detail, in
the Process Invoices and Make Payment topics of the Make Payment task of
Process Step 5: Measure and Manage Supply.
The Pricing Analyst uses the actual TCO in conjunction with the estimate to
track the cost trends over time. How much the actual data differs from the
estimate can suggest important areas that can improve future performance
(e.g., additional project metrics, cost reduction levers, cost avoidance
opportunities). The following should be considered when analyzing the actual
TCO:
• What caused the discrepancy between actual and estimate?
• If actual TCO is above estimate for certain activities, is any part of
the cost avoidable?
• If actual TCO is below estimate for certain activities, what is the
reason? What are the trade offs, if any, to the reduced cost?
• Does the comparison between actual TCO vs. estimated TCO
indicate any cost-saving opportunities not previously captured?
Are there any cost reduction levers in addition to those identified
in the Identify Cost Reduction Levers topic of the Conceptualize
Need task in Process Step 1: Identify Needs?
• What are some appropriate project metrics that should be
included to produce more accurate forecasts in the future?
Another advantage for calculating the actual TCO is that it allows for
comparison among alternative projects. For instance, the Pricing Analyst can
compare the actual cost of making an item in-house versus buying it, or sole
sourcing versus multiple sourcing, in terms of their impact on overall project
cost. The result can be used as support for future make versus buy and
sourcing decisions.
The information derived from calculating and analyzing the actual TCO at the
end of a project's life can be used to fine-tune future project estimates on
similar projects. It adds to the repository of project metrics, cost elements,
and cost data, which will add to project flexibility and help save time and
money on future endeavors.
Develop Preliminary Total Cost of Ownership Estimates topic, Conceptualize
Need task, Process Step 1: Identify Needs.
Identify Cost Reduction Levers topic, Conceptualize Need task, Process
Step 1: Identify Needs
Update/Refine Total Cost of Ownership (TCO) Analysis topic, Prepare Project
task, Process Step 2: Evaluate Sources
Conduct Should-Cost Analysis topic, Collect Ideas and Build Fact Base task,
Process Step 2: Evaluate Sources
Develop Switching Cost Analysis topic, Develop Sourcing Strategy task,
Process Step 2: Evaluate Sources
Review and Finalize Request for Proposals (RFP) topic, Perform
Solicitation-Related Activities task, Process Step 2: Evaluate Sources
Conduct Price/Cost Analysis topic, Evaluate Proposals task, Process Step 2:
Evaluate Sources
Identify Cost Reduction Levers topic, Conceptualize Need task, Process
Step 1: Identify Needs
Process Invoices topic, Make Payment task, Process Step 5: Measure and
Manage Supply
Make Payment topic, Make Payment task, Process Step 5: Measure and
Manage Supply
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