Essay PreviewMore ↓
The purpose of this research paper is to provide a description of the phenomenon Total Cost of Ownership. This is done on the basis of a case study which is about supply manager Joe Smith who has to buy 1000 computers for his organization. Organizations tend to scrap on the purchase price of a product; where it is much more effectively and efficient to bargain on the other Costs of Ownership. Although in business life people tend to think that buying is always more expensive than leasing, the opposite is true. Leasing 1000 computers over a life span of 3 years is more profitable than buying them.
Total Cost of Ownership a case study
Introduction to the phenomenon
It was the year 1987 when the Gartner Group popularized the form of full cost accounting named Total Cost of Ownership (TCO)(author, Gartner Total Cost of Ownership). Originally TCO was mainly used in the IT business sector. This changed in the 1980’s when it became clear to many organizations that there is a distinct difference between purchase price and full costs of a products ownership. This brings us towards the main strength of conducting a TCO analysis, besides taking the purchase costs into account, which consist of the amount a money an organization pays for the required service, product or capital outlay. It also considers 1. Acquisition costs; these can consist of sourcing, administration, freight, and taxes. 2. Usage costs, which consists of the costs associated with converting the given product or service into a finished product. And finally 3. End of life cycle costs; the costs or profits incurred when disposing of a product. TCO can be seen as a form of full cost accounting; it systematically collects and presents all the data for each proposed alternative.
In the case of making a TCO model, also opportunity costs and present value are taken into account. Taking present value into account means; making a difference between future and past cash outlays. This way the time value of money can be considered when comparing the different alternatives. Opportunity costs finally can be described as:
“The value of the next best alternative foregone as the result of making a decision”(Brue, 2005)
Having explained the phenomenon TCO briefly, we can take a look at the case study presented to us.
The case study-Buying 1000 Personal Computers
“Supply manager Joe Smith was considering the purchase of 1,000 desktop Personal Computers (PC’s) for his organization.
How to Cite this Page
"Total Cost Of Ownership." 123HelpMe.com. 23 May 2019
Need Writing Help?
Get feedback on grammar, clarity, concision and logic instantly.Check your paper »
- This paper reviews the state of practice regarding the application of life cycle cost analysis (LLCA) by examining the existing literature and guidelines across various states. The review gathers information in several topic areas related to the implementation of LLCA in asset procurement. 1. Government guidelines on LLCA Infrastructure asset The review of literature shows that LLCA has been widely used by states across the United States as part of the decision-making process in pavement management.... [tags: United States, Cost, Costs, Time value of money]
1375 words (3.9 pages)
- The real costs of home ownership Because of the high prices of homes in the United States, people often focus on only the buying price when considering the costs of owning a house, and neglect many other aspects of home ownership. A house is not your regular item that you buy and store or use for a limited amount of time. Houses come in a package with upkeep costs and taxes, and it’s wise to take these into account when analyzing your finances. The average cost of a house is estimated to be around $200.000 in 2013.... [tags: mortgages, expense, investment]
1301 words (3.7 pages)
- The Problem of Social Cost R.H. Coast writes The Problem of Social Cost, is an article examining the economic problem of externalities. The example of externality is a firm’s smoke imposed negative effects on neighbor properties. The standard economic analysis such of the economic situation is generally defined in differences terms of private and social good followed by the treatment of Pigou Economic Welfare. The standard economic analysis results in achieving most of the economists desires to hold firms responsible for the harmful that caused to injury by the firm’s smoke, or applies tax on the firm to equivalent the money term of damage that caused, or even excludes the firm from the resi... [tags: Economics, Costs, Cost, Externality]
1069 words (3.1 pages)
- Life-Cycle Cost Analysis Life-cycle cost analysis (LCCA) is a method for assessing the total cost of facility ownership. It takes into account all costs of acquiring, owning, and disposing of a building or building system. LCCA is especially useful when project alternatives that fulfill the same performance requirements, but differ with respect to initial costs and operating costs, have to be compared in order to select the one that maximizes net savings. For example, LCCA will help determine whether the incorporation of a high-performance HVAC or glazing system, which may increase initial cost but result in dramatically reduced operating and maintenance costs, is cost-effective or not.... [tags: Facility Ownership Finances Accounting Essays]
3682 words (10.5 pages)
- School shootings, gun disputes, a significant number of events inclining on today’s news have identified as anything related to weapons or acts of brutality. When will the America 's government regulate laws to address these issues. When has this become a daily routine in the general public, when will America obtain the change it deserves?Current US citizens question regulations required and moreover, what sorts of hindrances are legitimate to restrain gun ownership and utilization. This issue is much more essential than individuals might suspect, as this choice is influencing the American society and citizen 's security.... [tags: Firearm, Gun violence in the United States]
1180 words (3.4 pages)
- Critically compare the management concepts of ‘total quality management’ and re-engineering ,as they relate to a company of your choice . Total Quality Management (TQM) This approach to quality assurance requires the involvement of all employees in an organization. It is based on the principle that everyone within a business has a contribution to make to the overall quality of the finished product or service. By reducing waste and cost of rejected low-quality products TQM is a key component of the approach to operations management known as lean production.... [tags: Management, Business process reengineering]
754 words (2.2 pages)
- Operations management has been evolving over the past three decades with the introduction of new trends such as total quality management, which attempts to bring best practices to all areas within a company. Operations management can be viewed as encompassing supply chain management, quality management, product and process design, project management, and other topical areas defined as “the design, operation, and improvement of the systems that create and deliver the firm's primary products and services.” (Petersen, Aase, Heiser, 2011).... [tags: Business Administration]
1149 words (3.3 pages)
- As Seattle based company Billings Equipment Inc. pushes on to produce a new product line, the organization is instructing supply management employees to reduce costs and cycle times of suppliers, to adhere to the Target Cost objectives. The hasty production timeline restraints led to early missed cost reduction opportunities, unethical reneging on supplier price contracts in order to reduce costs, and jeopardizing Billings Equipment’s historically impeccable reputation for ethical treatment of suppliers.... [tags: Costs, Marketing, Cost, Price]
821 words (2.3 pages)
- Q1 Beam and Segev (1997) defined an electronic auction as a special case of electronic negotiation and an electronic reverse auction (e-RA)-synonymously named online reverse auction - is a frequently used type of electronic auction in B2B commerce. Among different procurement methods an electronic reverse auction emerged in the mid 1990s started to play an important role. Initially it was adapted by automotive and aerospace procurement managers for commodity parts. Nowadays it is applied and extensively used by many companies both of public and private sectors, non-profit organizations.... [tags: suppliers, cost, competition]
2308 words (6.6 pages)
- I. Tax Impacts of “Bootstrap” Structure The so called “bootstrap” acquisition is a modified straight stock sale where the purchaser of the ownership interest only purchases a portion of that which is outstanding and the remaining portion is redeemed by the entity itself. This type of transaction will leave the purchaser with complete ownership of the target organization for a lower cost. Both the sale and redemption are allowed to receive sale or exchange treatment, leaving the owners in the same tax position after the transaction as if it had been completed as a straight stock sale.... [tags: Property, Ownership, Corporation, Capital asset]
1390 words (4 pages)
The questions raised by the case are the following:
“1. Determine the total cost of this contract over 3 years
“2. How would you approach this supplier about reducing the total cost of ownership for computers over the life of this contract?” (Author)
The Case study- The answers to the questions
The outcome of the 1 question can be found on in the appendix of this case study. For the second question there is not one set outcome, it is open for discussion.
In general one would argue that Joe Smith should start by negotiating about the purchase price. This is not strange, on first hand it seems to be a severe expense; namely $1.200.000. Merely the opposite is true, it only consists for about 12 %( 1,2mln dollars) of the TCO for the 1000 Personal Computers (PC’s). And do you want to negotiate about this 12%? No because the margin retailers earn on PC’s is very small, so reducing the purchase price with a considerable amount can be described as a mission impossible. An organization would probably not want to bargain about the retail price, but instead about the other costs of ownership. The diagram below explains this.
Diagram 1- Total Cost
The results the diagram show use are unsettling, it shows that the purchase price of a product, service or capital acquirement is only a small portion of the total costs paid for a product over its life span. This shows us that when an organization wants to reduce the total costs of a purchase, the organization can better do this by negotiating about the acquisition, usage and end of life cycle costs.
Saving costs- The real costs saving possibilities
No we know where the costs can be saved, we will start with the last category; the end of life cycle costs. Receiving 36 dollars for a pc that cost you $1.200 three years ago may sound as a little amount of money for such an expensive product. And it is indeed a small amount of money, but considering that the $36.000 dollars is only about 0.4 percent of the TCO. It seems all the more irrelevant to do negotiate about the end of life cycle costs, also taken into account the lack of good alternatives for the disposement of the PC’s.
Now we have talked about the parts of TCO where you should not try to evaporate on, the fun stuff starts. As can be seen in the calculations in the appendix, the cost elements that require the biggest cash outlay are the equipment and network support cash outlays. Taking into account the high costs of the equipment support, one can assume that full equipment support is meant(author, Cardiff). This means that over the 3 year life cycle of the computers the supplier guarantees that will run any required software (Cardiff University). Know how do I save money on these huge cash outlays? (Respectively about 36 and 30, 6% of the total cost outlay). The key to saving money on these cash outlays is good negotiations. Negotiations in the sense that you maximize you’re buying power and decrease your TCO considerably. As an organization you should put on paper what you need and what you expect from the deal. And then you can go in the negotiations and discuss the conditions, the life span, level of support needed etc.
Some other suggestions for cost savings on TCO are the following:
Other measures to save costs are the following:
← Buy a volume software license
← Buy pre-installed software
← Environmentally conscious pc usage policies.
← Order a service contract for an additional fee in order to reduce equipment support costs.
← Internet/ computer usage policies and stricter control by management
Review and chosen course of action
A review of all the different available options on saving cost on TCO showed that there is considerable evidence that leasing a 1000 computers over a life span of 3 years is considerably less expensive than buying them (RFGonline). In the study is noted that there is a general myth on computer leasing, namely that it is always more expensive than buying. Therefore leasing may not be the option used most by different IT companies. From the study can be denoted that this is due to a to less innovating business approach of many companies. They tend to stick towards their old habits.
Other examples which show the feasibility of computer licensing are the following:
• Costs are more predictable
• Money is evenly spent over the 3 years
• More flexibility
• End of life cycle disposability options, including security disposability’s
• Off balance asset treatment.
Of course one may wonder whether leasing is more dangerous than buying. The proximities that your sensitive data will be “lost on the street” tend to be higher. But as can be seen in the listening above, there are several security disposability options, the one more rigorous than the other. Other negative sides related to leasing computers are
. Learning Experience from making the case
The first aspect of the phenomenon TCO that caught my attention was that the majority of the costs of a product are not the purchase costs, but all the other costs associated with a product. That these costs can be so exacerbating high, like almost 90% as shown in the case study. When I did some research about TCO, I came to the conclusion that I was not the only one. There are several companies out there who believe that the costs associated with making a TCO are too high and will not be earned back. Which seems strange to me, because a company will make its decisions not based on rational but on their business instincts. Of course I can understand that there are some negative aspects related to TCO, like no valuation of intangible assets, it takes the costs over the long term into account, it is hard to align TCO with a company’s strategic goals and it can be difficult to determine the exact costs of an asset (12 Manage the executive fast track). It is still hard to not see the benefits of a TCO model in my opinion. Also I improved my finance competencies, by understanding terms as FTE and PO.
Learning Experience from the presentation
By giving a presentation in a subject you are not yet familiar with, it is not unexpected that you make some mistakes. The same happened with our presentation, I and my colleague made some mistakes by both misinterpreting the given data in the case and by coming up with some naïve recommendations. Naïve in the sense that we focused too much on relative low expenses as the purchase price and salvage value of the computers. Although to some extent we tried to avoid bargaining on these expenses by choosing to lease the computers instead of buying them. It is definitely something that will help me both in my personal and professional environment. In my personal environment, by knowing that it can be very effective to negotiate about additional gadgets, warranty, support etc. when buying a high-end product. Even when buying for example an APPLE I phone, it can be very efficient to negotiate about additional gadgets, warranty and applications (Wired blog network). And in my professional knowing TCO can help me to negotiate more effective about sourcing, equipment support and network support.
Although our cooperation went well overall, I cannot under press the feeling that I have done the majority of the work. We met several times in the time period leading up to the presentation; although we were both present I did the majority of the work. It was I who did the calculations, came up with most of the possible courses of action to save costs, made the PowerPoint presentation and did a lot of work alone.
Works Cited List:12 Manage the executive fast track. (No year of publication known). Retrieved 02 20, 2009, from http://www.12manage.com/methods_tco.html
author, N. k. (n.d.). Cardiff. Retrieved 02 24, 2009, from http://www.cardiff.ac.uk/insrv/it/hardware/index.html
author, N. k. (n.d.). Gartner Total Cost of Ownership. Retrieved 02 24, 2009, from Gartner: http://amt.gartner.com/TCO/MoreAboutTCO.htm
Author, N. K. (n.d.). Webcat. Retrieved 02 20, 2009, from https://ncvista.blackboard.com/webct/urw/lc67299111011.tp0/cobaltMainFrame.dowebct
Brue, S. L. (2005). Microeconomics: Principles, Problems, and Policies. McGraw-Hill Professional. pp. 27. ISBN 0072875615. .
Cardiff University. (Date unknown). Retrieved 02 20, 2009, from http://www.cardiff.ac.uk/insrv/it/hardware/index.html
RFGonline. (2007, 5). Retrieved 02 20, 2009, from http://www.rfgonline.com/events/rfg_pctco_051007_0.pdf
unknown, A. (2009, 02 -). www.wcu.edu. Retrieved 02 18, 2009, from https://ncvista.blackboard.com: https://ncvista.blackboard.com/webct/urw/lc67299111011.tp0/cobaltMainFrame.dowebct
Wired blog network. (2007, 06 27). Retrieved 02 20, 2009, from http://blog.wired.com/gadgets/2007/06/iphone-total-co.html