portal tco presentation - fssi pmo gsa 060509

8/13/2019 Portal Tco Presentation - Fssi Pmo Gsa 060509

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Federal Acquisition Service

U.S. General Services Administration

TheFederal Strategic Sourcing Initiative (FSSI)

Understanding the Elements of Total Cost of Operations (TCO)


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Page 1

Provide a brief overview of strategic sourcing and the Federal StrategicSourcing Initiative (FSSI)

Provide a comprehensive definition of Total Cost of Operations (TCO)

Explain the key elements of TCO

Clarify the difference between cost elements and cost drivers

Present illustrative examples of acquisition decisions based on TCO analysis

Share the benefits that can be achieved by incorporating TCO analysis into theprocurement process

Workshop Objectives


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What is TCO?

Total Cost of Ownership

The total cost of owning and operating an asset over its expected period ofuse, i.e., lifecycle cost.

Also includes costs to acquire and dispose of the asset

Total Cost of Operations

Similar to Total Cost of Ownership, but recognizes that certain assetsmight be leased or provided as part of a contracted operation.

Provides a useful cost framework to evaluate:

Policy options

Business process alternatives Investment alternatives, e.g., in-house vs contract; own vs lease

Acquisition alternatives, e.g., vendor vs vendor; contracting options

Prelude


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The Federal Strategic Sourcing Initiative is an OMB-initiated program that wasestablished in November of 2005

An OMB memo issued May 2005 required agencies to identify no fewer than three commodities to bepurchased through strategic sourcing by October 2005 (excluding software purchased through SmartBUY).The memo stated that:

Agencies needed to leverage spending to the maximum extent possible Sound business decisions needed to drive spending

Federal Strategic Sourcing Initiative (FSSI)

In November of 2005, as a direct result of the OMB mandate, FSSI was established with a mission to

improve the federal government acquisition value chain, increase socio-economic participation and

ultimately lower total cost of operations and/or ownership for strategic sourcing vehicles

FSSI is governed by OFPP and the Strategic Sourcing Working Group under the Chief Acquisition Officers

Council

More than 60 Federal agencies, boards and commissions actively participate in the FSSI

Use of FSSI vehicles is non-mandatory, but agencies are encouraged to look at FSSI solutions first

Currently, three FSSI vehicles exist with GSA serving as the Executive Agent:

Express and Ground Domestic Delivery ServicesGSA Schedule 48 BPA

Office SuppliesGSA Schedule 75 BPAs

Wireless Telecommunications Expense Management (TEM) ServicesIDIQ, multiple award contract

2005 OMB Mandate


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Strategic sourcing is a process that strives to optimize an organizations supplybase while reducing Total Cost of Operations and improving mission delivery

Strategic sourcing is the collaborative and structured process of critically analyzing anorganizations spending and using this information to make business decisions about acquiring

commodities and services more effectively and efficiently

A group of senior Federal executives participating in the 2006 Public Sector StrategicSourcing Roundtable defined strategic sourcing in the federal government as:

A Systematic Processfor analyzing and developing optimal strategies for buying goods and services

A Data Driven Processthat relies on fact-based analysis for decision making rather than hunches

A Holistic Processthat addresses customer needs, market conditions, organizational goals andobjectives, and other environmental factors

Based on Market Intelligenceand takes into account small business capabilities

Inclusive of Customer Requirements

A Cross-Functional Approachthat incorporates the perspectives and expertise of acquisitionspecialists as well as end users

About Supporting an Organizations Missionthrough procured goods and services

About Developing Organization-wide Strategies

http://www.whitehouse.gov/omb/procurement/comp_src/implementing_strategic_sourcing.pdf


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The benefits of strategic sourcing and drivers of TCO are numerous and go farbeyond simple reductions in unit costs

Primary Benefits of Strategic Sourcing

Reduction in CostPer Unit

Change inConsumption/

Volume

ImprovedOperatingEfficiency

Improved Focuson Socio-

economic Goals

Pricing Improvements Lower unit price Volume rebates Payment term discounts

Supply Chain Savings Cost of capital Warehousing costs

Shipping costs

Reduced Lifecycle Costs Maintenance costs Operating costs Disposition costs

Reduced Procurement-Related Operating Expense

Reduced Non-ProcurementRelated Operating Expense


Volume

Socio-economic Goals Structured analysis of

small/disadvantagedbusiness opportunities

PO Processing Accounts Payable Receipt/Warehousing Standardized

procurement process

Other operatingefficiencies

Performance Monitoring Structured metrics and

periodic review ofcontractor performance

Demand Management Eliminate demand Reduce consumption Encourage substitution Change product mix

Specification Review Eliminate gold-plating

Simplify specifications Alternative products

DRIVERS OF TCO


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What is Total Cost of Operations?


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WHAT IS TOTAL COST OF OPERATIONS?

Total Cost of Operations (TCO) is a comprehensive, full cost accountingestimate designed to help consumers and commodity managers assess costs

TCO consists of costs incurred throughout the life cycle of a service orcommodity, including acquisition, deployment, operation, support and retirement

TCO identifies costs which are made up of two major components - direct andindirect:

Direct costs traditionally are made up of labor and capital costs

Indirect costs are more of the soft costs associated with an acquisition and

tend to be more difficult to measure and rationalize

One of the primary goals of strategic sourcing is the reduction of Total Cost ofOperations

Understanding TCO broadens our baseline understanding of spend and identifiessourcing opportunities beyond purchase price


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PurchasePrice

Supplier'sCost

Supplier's

Profit

AcquisitionProcess Costs

Contract

ManagementCosts

Bid & AwardCosts

LifecycleCosts

End of LifeCosts

Total Cost ofOperations

Costs

to

Buyer$

Operation

Costs

Management

Costs

Disposal/

CloseoutCosts

ContractManagement

Costs

Supplier's

Profit

Supplier's

Cost

Bid &

Award Costs

Disposal /

Closeout Costs

Management

Costs

Operation

Costs

TCO of a commodity goes beyond purchase price, it also includes acquisition costs,lifecycle costs, end of life costs and other

TOTAL COST OF OPERATIONS (TCO) ELEMENTS(Conceptual Example)

ILLUSTRATION

For some commodities, cost elements beyond purchase price may be significant, at timesequaling or exceeding initial purchase cost over the commodity lifecycle


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Different commodities can vary significantly in their composition of TCO elements

Many buyers will focus on achieving acompetitive purchase price and willoverlook opportunities to improve othercost elements

For some commodities, purchase price

is not the largest cost element

Therefore, it is important to consider allcost elements, including (but not limitedto):

Internal procurement, contractmanagement and billing/invoicingprocesses

Internal management of thecommodity

Operational costs (cost of use,spare parts, maintenance, etc.)

Disposal costs

NOTES

0

20

40

60

80

100

Example A -Refrigerator

Acquisition Process Costs

Purchase Price

End of Life Costs

Lifecycle Costs

Acquisition Process Costs

Purchase Price

End of Life Costs

Lifecycle Costs

Example B -Laptop Computer

TOTAL COST OF OPERATIONS (TCO) ELEMENTS(Conceptual Example)

ILLUSTRATION


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Key Elements of Total Cost Analysis:Understanding Cost Elements vs. Cost Drivers


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Understanding the total cost of a commodity involves the identification of costelements and cost drivers

What are they? Examples

COSTELEMENTS

Components of total cost of operations(TCO)buckets of cost that can bequantified

Transportation costs

Purchasing administrationcosts

Inventory costs

Supplier certification costs

COSTDRIVERS

Factors or activities that can be changedand have an impact on the magnitude ofthe cost element

Distance shipped

Number of suppliers

Number of purchase orders

Number of different SKUs

COST ELEMENTS VS COST DRIVERS

Cost drivers can at times be significant sources of savings for some commodities

Drivers of cost within suppliers operations can be very important for commodities

where unit price is still likely to be the largest component of our total cost


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When identifying the various cost elements of TCO, it is also important to considerthe percentage of TCO that is comprised of each the costs elements

TCO

ElementDescription

Estimated% of TCO

Purchase Price &Acquisition ProcessCosts - Device

Hardware includes the actual pricepaid for the product

Lifecycle Costs -Operations andMaintenance Costs

Operations and Maintenancecosts include maintenance, repair,

help desk, asset management,upgrades, licensing, etc.

Lifecycle Costs-Consumables

Consumables (e.g. paper, ink,toner, cartridge) are a significant

part of the office imaging cost

NETWORK PRINTER COST COMPONENTS

5%*

50%*

45%*

Source: Prudential Equity Group Research, Oct 2006; Lexmark International; Censeo Analysis

* Percentages referenced above are based on an industry report from Lexmark International; this break outwill not be true in all scenariosEnd of Lifecycle Costs are also components that impact the TCO of anetwork printer, but the estimated percentage was not provided in the referenced industry report

For a common piece of office equipment - a network printerthere are multiple TCOcomponents that should be considered when conducting an acquisition. What percentage of thetotal cost do each of these components make up?

The percentage break out of TCO components does not always align with initial assumptions andcan impact the results of a total cost analysis


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As demonstrated in the previous example, consumables, maintenance & ITsupport, and equipment costs are the key cost elements of desktop printers

RELEVANT TOTAL COST COMPONENTS

Purchase Price:

Hardware: Annual depreciation cost of printers

Acquisition Process Costs:

Acquisition: Estimated acquisition costs associated withrequirements validation & contracting purchasing activity

Lifecycle Costs:

Operations & Maintenance: IT Support: Cost estimate of in-house IT help desksupport provided to local and network printers

User Support: Cost estimate of work effort associatedwith toner and paper replenishment performed by users

Property Mgmt: Estimated property managementpersonnel costs associated with managing printers

Consumables:

Paper and toner costs Power: Estimated power costs associated with devices

End of Life Costs:

Disposal: Cost of product disposal at end of life

Understanding internal costs related to purchasing andmanaging a commodity is important in identifying

savings opportunities

Source: Prudential Equity Group Research, Oct 2006; Lexmark International;Censeo Analysis

DESKTOP PRINTERTOTAL COST OF OPERATIONS BREAKDOWN

* Percentages referenced above are based on an industry report from LexmarkInternational; this break out will not be true in all scenariosEnd of LifecycleCosts are also components that impact the TCO of a network printer, but the

estimated percentage was not provided in the referenced industry report

Purchase Price& Acquisition

Process Costs -Device

LifecycleCosts

Operations &Maintenance

LifecycleCosts -

Consumables

Total Costof

Operations


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Key Elements of Total Cost Analysis:

Conducting A Complete TCO EvaluationIn The Workplace


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With most acquisitions, unit price is often the only cost component considered

Device A Device B Device C

DeviceB&W Printermedium size

B&W Printermedium size

B&W Printermedium size

Volume 100 100 100

Unit

Price/Device

Cost

$1,031.00 $783.75 $725.20

Source: Censeo analysis

$725.20


Based on the data above,

Device C would b e the

best value


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But to truly obtain best value, it is critical to evaluate all TCO cost componentsbefore completing an acquisition

Device A Device B Device C

Device B&W Printermedium size B&W Printermedium size B&W Printermedium size

Usage* 4,000 pg/month 4,000 pg/month 4,000 pg/month

Volume 100 100 100

Product Support 4-Yr Extended Warranty 4-Yr Onsite Warranty 4 Yrs Onsite Product Support

Purchase Price Device $1,031.00 (34% of total cost) $783.75 (28% of total cost) $725.20 (19% of total cost)

AcquisitionProcess Costs

Procurement $150.00 (5% of total cost) $150.00 (5% of total cost) $150.00 (4% of total cost)

Lifecycle Costs

Est. 4-YrConsumables Cost

$1,425.67 (47% of total cost) $1,282.50 (46% of total cost) $2,811.60 (72% of total cost)

4-Yr Product Support

Cost

$408.00 (13% of total cost) $538.20 (19% of total cost) $144.00 (4% of total cost)

End of Life Costs Disposal $50.00 (2% of total cost) $50.00 (2% of total cost) $50.00 (1% of total cost)

Total 4-Yr Estim ated TCO $3,064.67 $2,604.45 $3,880.80

* Usage estimates are based on avg # users per device (8), typical # of pages per user (500)resulting in the estimated total # of monthly pages (4,000). Projected Consumables Costsassume utilization of high-yield cartridges where available.

Source: Censeo analysis

$2,804.45


A com plete analysis of

TCO indicates that Device

B tru ly is the best value

solut ion


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Key Elements of Total Cost Analysis:

Conducting A Complete TCO EvaluationIn Daily Life


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The process of conducting a TCO analysis can be applied in everyday life

TOTAL COST OF OPERATIONS (TCO) EVALUATION

TCO analysis indicates that the cheaper car to buyis actually the more expensive carto own and op erate

Example A

(Non hybrid)

Example B

(Hybrid)

Purchase price Sticker Price:$22,151

Sticker Price:$23,650

Acquisition process and lifecyclecosts*:

Depreciation Taxes and Fees

Insurance Premiums

Fuel

Maintenance

Repairs

Interest on Financing

Stimulus - Auto Assistance

Ownership Amendment

$9,981$1,600

$10,216

$10,700

$3,050

$671

$3,840

$1,500

$10,549$1,635

$10,216

$5,600

$3,050

$671

$3,953

$1,500

Purchase price after TCO analysis Price: $40,058

(cost is 53 centsper mile to drive)**

Price: $35,658

(cost is 48 cents permile to drive)**

*End of Life Costs are not included in this example

**Cost of ownership is assumed over a five year period and 15,000 miles a year

Source: http://www.edmunds.com/advice/buying/articles/59897/article.html

When purchasing a carconsumers often consider only

one variablesticker priceand based on the sticker price

in the example to the right,Example A, the non-hybrid is

the more economic choice


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Method ofCommuting

CostComponents

Estimated Cost (perday)

Total EstimatedCommuting Cost(per day)

Drive Parking

Gas

$10

$5 (each direction)

$20

PublicTransportation

Fare

Parking

$3.50 (each direction)

$5

$12

Estimated Daily Cost of Commuting

When selecting a means of transportation, it is important to understand howdifferent cost drivers can influence the TCO

But are these the only cost d r ivers?

Commuting to work is a daily activity for most individuals. In nearly all instances, there are anumber of expenses incurred with a daily commute. These expenses will vary based on methodof transportation, distance traveled, number of options available, etc. These expenses may alsodrive us to choose one method of transportation over another.

For this exercise, assume that there are only two commuting options available, to drive or toutilize public transportation. Based on the out of pocket expense incurred on a daily basis,

lets calculate the cost of a daily commute:

Based on an initialassessment, thereare multiple costcomponents that

should be

considered forboth methods oftransportation


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In our assessment of the daily cost of commuting, it is important to remember that allcosts may not be apparently obvious

Method of Transportation

Drive PublicTransportation

Parking $10 $5

Fare $0 $3.50 (eachdirection)

Gas $5 (eachdirection)

$3 (eachdirection)

Car Insurance $5.68 $5.11

Depreciation of the car $1.69 $1.69

Maintenance and repair of thecar

$5.50 $4.95

TOTAL $32.87 $29.75

Estimated Daily Cost of Commuting

In our calculations of the cost of a daily commute, have we considered all costs?

Co

stComponents

*Figures for drive method assumed for a 2009 Honda Civic over a five year period and 15,000 miles a year

Source: http://www.edmunds.com/advice/buying/articles/59897/article.html

There are a number of additionalcost drivers that were notimmediately apparent in thisexample

These additional costs can have asignificant impact on total cost, andonly by assessing all drivers canone truly understand the total costand make an informed decisionbetween the two alternatives

Time is another cost element that

was not considered. Time can beassessed as an opportunity cost.

Because of limited contractingresources within thegovernment, time is a criticalelement in any acquisition andcost analysis

NOTES


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Understanding the Benefits of TCO


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Once we understand cost elements and drivers and identify specific actions wecan take to impact total cost, savings estimates can be developed to supportrecommended changes

Price Volume Rebates Payment term discounts

Cost of Capital

Warehousing Costs Shipping costs

Maintenance costs Operating, energy and other costs Disposable costs

Elimination Substitution Change in mix

Cost of processing purchase orders Cost of processing accounts payable Cost of receipt/warehousing

Other Operating efficiencies

TotalSavings

Related toPurchasedGoods and

Services


Volume

Reduced LifecycleCosts

ReducedProcurement

Related OperatingExpense

Reduced Non-Procurement

OperatingExpense

Reduction in

Cost per Unit

ImprovedOperatingEfficiency

Reduced Supply

Chain Costs

Reduced Prices

SAVINGS CALCULATION FRAMEWORKTOTAL COSTS

Examples


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Understanding TCO and how to apply the concept to acquisition decisions can resultin significant savings opportunities, specifically unit cost reduction and plannedchanges in consumption and volume

Unit price reductions can be achieved by:

Negotiating payment terms to gainpricing improvements and discounts

Optimize the supply chain

Reducing lifecycle costs through themanagement of maintenance costs,operating costs, and disposal costs

Planned changes in consumption andvolume can be achieved through:

Demand management, eliminating

demand and reducing consumption

Specification review, simplifyingspecifications and suggestingalternative products

NOTES

The fol lowing s l ide prov ides an example of how un i t pr ice reduct ions and chang es in cons um pt ion/volum e canresul t in reduced l i fecyc le costs and ef fic ienc ies


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$10K

$20K

$30K

$40K

$50K

Status QuoScenario 1 -

Low quality withfull replacement

Disposal of Roof(End of Life Costs)

Acquisition(Acquisition Costs)

Minor Repairs(Lifecycle Costs)

RoofReplacement

(LifecycleCosts)

Initial

Roof(PurchasePrice)


Low quality withpartial replacement



Minor Repairs(Lifecycle

Costs)

Major Repair(Lifecycle Costs)

RoofReplacement

(LifecycleCosts)

Initial

Roof(PurchasePrice)


Low quality withpartial overlay


Acquisition (Acquisition Costs)

Minor Repairs(Lifecycle

Costs)

MajorRepair

(LifecycleCosts)

Initial

Roof(PurchasePrice)

High Quality Roof20 - year

InitialRoof

(PurchasePrice)



Minor Repairs(Lifecycle Costs)

ROOFING SCENARIOS 20-YEAR LIFETIMECOST COMPARISON

($ per SF)

1 2 3 4

In the example below, understanding the TCO elements of lifecycle costs andspecification requirements can result in significant cost savings when making anacquisition decision

Reduction in Cost per Unit andLifecycle Costs:

Investing in higher qualitymaterials, workmanship, andwarranty coverage upfront willcost more in year one, but willprovide the lowest lifetime TCO

Change in Consumption/Volume:

For major facility capitalinvestments like HVAC equipmentor roofing, clearly identifying and

assessing specifications canresult in cost savings by reducingconsumption (and limitingreplacements of parts or fullstructures)

NOTES

EXAMPLE

Source: Censeo Analysis


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TCO can also help evaluate the benefits of operational decisions such as changesin consumption/volume and improved operating efficiency

Change in consumption/volume and

improved operating efficiency can beachieved in a number of ways:

Through the implementation of anonline ordering system to reducepaper and manual transactions andimprove invoice processing andauditing

Business Process re-engineering

NOTES

The fol lowing sl ides prov ide an examp le of how to calculate savings gained throu gh im proved op erat ional eff ic ienc ies


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Reducing processing times improves operational efficiency

1) Employee walks to copier room to obtain a FedEx letter

2) Employee returns to their desk and clicks on FedExOnline

3) After 3 clicks the label prints out on the employees

printer

4) Employee walks back to the copy room to place theoutgoing letter in a designated place

5) At a designated time a mailroom employee walks thehalls and picks up all out going FedEx packages andmail and returns all to the mailroom

6) FedEx then picks up all outbound shipments

Al l t ime was studied and th is took o n average 1

minu tes and 22 second s to comp lete

REVISED SHIPPING STEPS

IMPROVED OPERATIONAL EFFICIENCYPROCESSING TIMEShipment of FedEx Packages

1) Employee walks to copier room to obtain FedEx letter andrequisition form

2) Employee walks back to their desk to complete the form

3) Employee secures requisition form to the letter with tape

4) Employee walks back to the copy room to place theoutgoing letter in a designated place

5) At a designated time a mailroom employee walks the hallsand picks up all out going FedEx packages and mail andreturns all to the mailroom

6) In the mailroom the mailroom employee keys into a FedExsystem the destination address

7) The mailroom employee records the tracking number on therequisition form

8) The form is returned to the original sender

9) The form is secured in a file cabinet

10) FedEx then picks up all outbound shipments

Al l t ime was studied and th is took o n average 14

minutes and 42 seconds to complete

PREVIOUS SHIPPING STEPS

Source: This example is provided courtesy of Federal Express Corporation


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Reduced labor costs is an example of the savings that can be achieved throughimproved operational efficiency

STEP 1:Divide the hourly labor rate ofthe individual conducting the procurement(based on GS level and pay grade) by 60min in an hour to generate the estimatedlabor rate per minute.

STEP 2:Next, work with subject matterexperts to estimate the current and futureprocessing time of the given transactionand subtract the current time from thefuture processing time. Then, multiply thevariance by the labor rate per minuteidentified in Step 1.

STEP 3:Identify the total number oftransactions that are processed per year.

Multiply this number by the labor costsavings per unit identified in Step 2.

These calculations result in theannual estimated labor rate savings

achieved through improvedprocessing time

Savings CalculationsSAVINGS CALCULATION

IMPROVED OPERATIONAL EFFICIENCYPROCESSING TIMEReduced Labor Costs Associated With Shipment of FedEx Packages

1

2

3

Source: This example is provided courtesy of Federal Express Corporation


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STEPS TO CONDUCT A TCO EVALUATION

1) Before beginning any acquisition, through market research or product analysis,identify the key cost elements that comprise the total cost of operations for thiscommoditybeyond just price

2) Identify the cost drivers for this commoditywhich of these can we

control/influence?

3) Once the cost elements and drivers have been identified, assess each of thesecomponents and assign an estimate percentage of total costif the assignedpercentage is not significant (falls below 5%) eliminate it from your evaluation

4) Identify the appropriate timeline to measure the total cost of this acquisition

5) With a revised, prioritized list of TCO components, assess the true cost of thecommodity

6) Compare and save!

There are a number of key steps that should be completed as part of any acquisition toensure a thorough TCO evaluation has been conducted and best value achieved


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Points of Contact:

GSA FAS - FSSI Program Management Office

Michel Kareis, PMP

FSSI Program [email protected](703) 605-3669FSSI website: www.gsa.gov/fssiFSSI email address: [email protected]

Office of Federal Procurement Policy (OFPP)

Jack [email protected](202) 395-6106


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