Free Essay About Total Cost Of Ownership

Management

In a supply chain management the issue of total cost of ownership (TCO) is very important. It focuses on the cost of doing business with a particular supplier for a particular good or service. TCO modeling does not include precise price assessment but estimates major cost issues that may appear while making a decision or in the future. In other words, TCO focuses on quantifiable goods. It has advantage over price and cost analysis because it combines and widens them both at once. TCO is a philosophy that makes it possible to receive increased visibility and concern among organizations for a variety of reasons.
TCO modeling allows seeing bigger picture that prevents value erosion. Businessmen can assess how their decision affects revenue and what it may cost in the future. Two current world trends – globalization and outsourcing – require TCO modeling for valid data analysis and decision making. It can help to receive big-picture perspective analysis and to estimate the costs of outsourcing decision that extend beyond price. The TCO analysis has 5 steps such as choosing a project, forming a team, data gathering and analysis, fine-tuning TCO and sensitivity analysis, and presentation of results and their implementation.
TCO analysis differs from simple use of accounting data or price alone. It cannot also be treated as static; the results should be reanalyzed and audited. TCO is getting more and more recognition because operationally TCO information can be used to select and manage suppliers on a day-to-day basis. Tactically, it can be used to improve routine processes. Strategically, TCO may help the organization to determine what it needs to make versus buy, and where to focus for maximum results.