Eskom Procurement Book 2015

TOTAL COST OF OWNERSHIP (TCO)

to develop total cost models that have many external assumptions as this can make the model highly suspect. A fourth data category is possible here: data that are absent from a total cost model. The challenge with any cost model is that, at times, the cost to collect data outweighs the value of the data. At other times the sheer number of possible cost elements that could be part of the model becomes overwhelming. While this could never be said about product or service quality, close enough is probably good enough as it relates to total cost models. Regardless of the type of cost model used, it is important to understand the data that are populating the model. Relying on a model that includes data based largely on assumptions is not a good idea. In this case, 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. The question becomes how confident could the buyer be of the accuracy of the output. While beyond the scope of this book, sophisticated statistical techniques are available that help identify confidence intervals around total cost estimates. Research has revealed that there are multiple cost categories and elements that can make up total cost measurement systems. This issue becomes more complex once it is accepted that different types of cost models exist. It is easy to see that models that attempt to measure cost elements from point of origin to final point of consumption at the customer (end-to-end models) can be broad. One way to approach this issue is to present the cost elements that are most likely to be included in total cost models. Figure 6.2 illustrates the various key cost elements. A variety of elements is included in total cost models. Literally dozens of cost elements could populate a total cost model, particularly those that relate to international transactions. Secondly, except for price and transportation costs, no clear consensus exists regarding the elements to include. As they apply to total landed cost models, cost elements are often divided into categories that reflect a logical progression of material through the supply chain. The following illustrates these categories along with examples of costs that fall within each category: • Within country of manufacture: Materials, storage, labour, quality, overhead, obsolescence, packaging, risk or disruption, exchange rates, inventory carrying charges. • In transit to country of sale: Transportation charges, fuel surcharges, insurance, port charges, handling, security, banking fees, broker fees, potential detention charges, duties, handling agency charges, inventory carrying charges.

6.4.2 SPECIFIC TOTAL COST ELEMENTS

138 CHAPTER 6