Once the Postal Service has assessed resources, the next step is to gain an understanding of the total life cycle cost of a product or service. TCO refers to the total cost incurred over the useful life of an item, encompassing development, purchase, use, maintenance, support, and disposal. A TCO analysis will assist the identification of costs and risks associated with each life-cycle stage, their relationships, possible cost reduction levers, and alternative products or services. A TCO analysis is especially helpful for more complex purchases; it does not need to be performed for every purchase.
Cross-functional collaboration is especially important to ensure that the TCO accurately reflects all costs at each life cycle stage. The pricing analyst will work closely with the item manager, and with representatives from responsible Postal Service organizations, as appropriate, to complete the initial TCO analysis. Collaboration should continue for subsequent updates to the TCO, as more information becomes available. The representatives will share specific knowledge of the subject under analysis and provide input to the cost modeling process.
A TCO analysis exposes the hidden costs that may be overlooked during budget planning or when making purchase decisions. As a result, it becomes possible to yield higher savings by optimizing relevant cost elements throughout the entire project life cycle. A preliminary estimate of TCO will emerge during USPS Supplying Practices Process Step 1: Identify Needs; a more robust TCO estimate will be conducted in Section 2-3, Update⁄Refine Total Cost of Ownership Analysis.
When using TCO analysis for budget planning purposes, it is important to keep in mind that the cost values are based on historical costs, planned operating factors, and cost projections adjusted for future conditions (using mail volume projections, inflation factors, and other adjustment tools).
When using TCO analysis to make purchase decisions, it should be noted that the analysis focuses on cost exclusively. There are three major implications:
- Qualitative factors, such as organizational need and product performance, must be examined closely. Planned organizational growth, reductions, and skill changes should be identified and factored into the cost models, as should product performance, which is a direct driver of many other factors such as labor, materials, output, and liability.
- TCO excludes business benefits other than cost savings. However, identification of client goals and strategies will clarify these benefits and their relative value. Concerns like environmental cleanliness can drive costs up, but recognition and incorporation of that cost can be reasonably quantified and included in the TCO model. This inclusion has the benefit of ensuring that decision relationships are understood and supplier actions are identified.
- The cost model(s) should contain considerations for performance, speed, and reliability associated with each of the life cycle cost elements illustrated in Figure 1.4. For example:
While the TCO analysis is a valuable tool for decision support on a wide range of purchases, it is most applicable to strategic purchases (with a focus on continuous improvement) and to critical projects (with an emphasis on life cycle cost). The TCO analysis can be used to compare costs incurred under various scenarios and to assist the selection of the most cost effective approach to obtain the desired product or service.
The basic process for developing a preliminary TCO estimate includes:
- Identify major TCO cost elements that are applicable to the life cycle of the product or service.
- Design cost models that estimate each cost element.
- Calculate the preliminary TCO, using results from the cost model(s).
Figure 1.4
Life-Cycle Cost Elements
These cost elements are defined as:
