Eskom Procurement Book 2015

TOTAL COST OF OWNERSHIP (TCO)

carrying costs are 24% annually, which the company must apply to the dried fruit that is held in storage. When a container of dried fruit is required at the Chefs Supply processing facility, a local freight company will deliver the container at a cost of $275 per container. Additionally, Chris estimates the cost of incoming receiving and quality control procedures to be $4 per pallet. He further estimates that the company will incur a 3% loss of the total purchased fruit. This loss will result from the nature of the product, the supply chain distance involved (as in transit damages), and the longer-term effects of storage. Chris also determined, in conjunction with the industrial engineers in the processing facility, that the historic yield of dried fruit when blended into various products is 98%, which means that the company wastes an additional 2% of the product by volume. This loss is not recoverable and is in addition to the 3% loss mentioned earlier. Some companies may exclude this yield loss from the total landed cost calculation because it occurs during processing. Other companies may also include the effect of payment terms or rebates provided by the supplier. It is difficult to find two total cost models that include exactly the same cost elements since no standard exists defining what these models should contain. Finally, in addition to the costs noted above, corporate accountants at Chefs Supply require that a 17% assessment on the unit price of the dried fruit be included to cover general and administrative overhead costs at Chefs Supply. With any total cost model the challenge involves getting complete and reliable data. Chris must identify and collect the data he requires before he can develop a cost model that progressively builds up the total cost per kilogram. Companies that undertake this build up often find that their estimated total cost far exceeds the more obvious unit price. Who can possibly know precisely the true cost of international purchasing without undertaking this kind of exercise? Table 6.2 provides some important information, such as annual usage (i.e., demand), that is required to calculate the per kg cost for each cost element.

Table 6.2: Total dried fruit requirements [8]. Equals … Dried fruit per bag (one bag inserted into one box) 50 kg per box 40 boxes per pallet

2 000 kg per pallet

20 pallets per ocean shipping container One container required per month

40 000 kg per container

480 000 kg of dried fruit required annually (40 000 lbs x 12)

Table 6.3 presents the analysis that arrived at the total cost per kg of dried fruit. The table also includes explanations for the determination of each cost.

141 CHAPTER 6