Eskom Procurement Book 2015

TOTAL COST OF OWNERSHIP (TCO)

Why are the models usually wrong, at least to some degree? The data that populate a total cost model can be segmented into four categories, representing a hierarchy frommost to least reliable, as illustrated in Figure 6.1. These categories conveniently start with the letter ‘A’. Regardless of the cost model used, the need to understand the data that are populating the model cannot be understated. Supply managers may make decisions based on data that fall largely at the bottom of the reliability scale. Like forecasting models, total cost models usually arrive at some number to report in the way of total cost. But what is the confidence around that number? Used correctly, TCO models can reduce operational and financial risk; used incorrectly, these models can elevate rather than alleviate risk.

Figure 6.1: Total cost data reliability [5].

6.3 TYPES OF TOTAL COST MODELS All total cost models are part of a group of measurement systems called cost- based systems. One of the main objectives of these systems is to replace subjective measurement or assessment with data that are more objective.

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