Workshop Title

1
Building Procurement Fitness
Building Procurement Fitness
Total Cost of Ownership Not just Low Bid
"Low, is not always the way to Go"
Katrina S. Nock/Pete Stamps Procurement
Management Account Executives S202PPnock/stamps No
vember 14, 2005
2
Total Cost of Ownership

• n Definition
• Life cycle costing cost of a product or
• service acquisition maintenance to
• disposal.

Building Procurement Fitness
3
LCC

• n What gives public bodies the authority to use
  Life Cycle Costing?

Building Procurement Fitness
4
Virginia Public Procurement Act, Section
2.2 4301, Section 4

• nEvaluation of bids based upon the requirements
  set forth in the invitation, which may include
  special qualifications of potential contractors,
  life-cycle costing, value analysis, and any other
  criteria such as inspection, testing, quality,
  workmanship, delivery, and suitability for a
  particular purpose, which are helpful in
  determining acceptability.

Building Procurement Fitness
5
What is Total Cost of Ownership/Life Cycle
Costing ?

• n TCO is a type of calculation designed to help
  consumers and enterprise managers access the
  combined hard and soft costs of owning assets as
  well as benefits related to the purchase of
  computer software or hardware.

Building Procurement Fitness
6
What is Total Cost of Ownership/Life Cycle
Costing ?

• n The aim of TCO/LCC analysis calculates the cost
  of a system or
• product over its entire life span.

Building Procurement Fitness
7
What is Total Cost of Ownership/Life Cycle
Costing ?

• n The analysis of a typical system could
• include costs for
• Planning,
• Research and development,
• Production
• Operation
• Maintenance,
• Disposal or salvage,
• Sometimes called a cradle-to-grave analysis.

Building Procurement Fitness
8
Total cost of ownership Analysis
nTCO analysis is used to support acquisition and
planning decisions for a wide range of assets
that bring significant maintenance or operating
costs across a usable life of several years or
more. Such as, n computing systems n vehicles n
laboratory and test equipment n medical
equipment n manufacturing equipment, and private
aircraft, for instance.
9
TCO Analysis Model
System Life Cycle System Life Cycle System Life Cycle System Life Cycle System Life Cycle
Resources Acquisition Operation Growth Change (Upgrades)
Resources Hardware
Resources Software
Resources Personnel
Resources Training
Resources Facilities

10
What can you do to determine Total Cost of
Ownership ?
n Avoid ambiguity n Avoid time and material
quotes n Boardroom Pilot n Include all direct
costs n Maintenance costs n Hardware costs n
Include all indirect costs
11
What can you do to determine total cost of
ownership ?
n Talk to references n Include future costs n
Put it in writing n License costs n Avoid
customization n Business process improvement n
Phased implementation
12
When comparing similar systems for Total Cost

• Use the following set of criteria
• Capital- hardware and software
• n Administrative-non-technical
• support, administrative, non-
• technical direct and in- direct
• management costs.

13
When comparing similar systems for Total Cost of
Operation
n Technical support n End user operations n
Server costs n Local Data Management
14
Total Cost of Ownership Comparisons Table 1

100 users Company A Company B Company C
Yearly TCO/ 241,767 352,794 186,250
Desktop w/Monitor 389 1,000 800
Server/OS (3)29,472 19,899 6250
Office Applications Windows XP 12,200 Windows XP 12,200 Linux 249
Browser Co. A recommends thirty users IE per server, three servers IE Netscape
15
As noted before, Life Cycle Costing (LCC) is a
tool used to measure the complete cost of what is
being offered. The basic formula for LCC is
nLCCA (OM) R. Where A Total Acquisition
Cost O Operating Cost MMaintenance Cost R
Salvage Value
16
Example Mailing MachinesWe are going to
evaluate based upon an outright purchase and on a
rentalOutright PurchaseLCC A O M2 M3
R 12MR RMwhere A total acquisition
cost including one year warranty (less meter
rental). O cost of one year of consumable
supplies (including ink, toner, drums, labels,
and any other consumables required during the
one year period based on the letter and mixed
mail quantities, with the clarification that
when the one year total quantity is exceeded
during an actual contract, the agency will be
responsible for payment for additional
supplies, with the agency permitted to
purchase equivalent supplies from other
sources),
17
Example Mailing Machines (contd)LCC A O
M2 M3 R 12MR RM
M2 full service maintenance cost including
preventive maintenance for year two, M3
full service maintenance cost including
preventive maintenance for year three, R
rate change insurance for a one year 12MR
meter reset cost for 12 resets at a rate of
one per month, RM rental of postage
meter for a one year period
18
Example Mailing Machines (contd)36 Month
Rental36 Month RentalLCC A O R
36MR RMwhere A total 36 month rental
cost (less meter rental). O cost of three
years of consumable supplies (including ink,
toner, drums, labels, and any other consumables
required during the three year period based on
the letter and mixed mail quantities, with the
clarification that when the three year total
quantity is exceeded during an actual contract,
the agency will be responsible for payment
for additional supplies, with the agency
permitted to purchase equivalent supplies from
other sources), R rate change insurance for
a one year period, 36MR meter reset cost for
36 resets at a rate of one per month, RM
rental of postage meter for a three year period,
19
Example CopiersWhat elements would we
consider to evaluate copiers using life cycle
costing?
20
Example VehiclesWhat elements would we
consider to evaluate vehicles using life cycle
costing?
21
QUESTIONS????