TCO - Institute for Supply Management...Cost Accounting reflecting TCO approaches Visibility and...
Transcript of TCO - Institute for Supply Management...Cost Accounting reflecting TCO approaches Visibility and...
TCOWhen you know the price of everything and the value of nothing
© 2016 by Honeywell International Inc. All rights reserved.
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Honeywell Overview
AerospaceHome andBuilding
Technologies
Performance Materials And Technologies
$38.6B Global Industrial Company Serving Major Industries Globally
Connected
Plants
Orion Console
Connecting
Homes & Buildings
evohome
Connected
Aircraft And Auto
IntuVue ® 3D Weather Radar
Safety And Productivity
Solutions
Connecting Workers
And Workplaces
Vocollect
$15.2B $9.4B $5.6B $9.2B
Deep Knowledge And Strong Positions Across Major Segments
© 2016 by Honeywell International Inc. All rights reserved.
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Expanded Workflow And Automation Solutions
Maintenance
and Inspection
Automating
In-Store RetailVocollect
Warehouse Logistics Retail Store
$4BOpportunity
Launches
in 2017
$1BOpportunity
Available
Today
$0.6BOpportunity
Industry
Leader
+500,000 warehouse
operators in more
than 40 countries
+1,000 technicians 2 pilots in October
with more than
10 retailers evaluating
© 2016 by Honeywell International Inc. All rights reserved.
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Intelligrated is a leading single-source
provider of intelligent solutions that drive distribution
and fulfillment productivity for retailers, manufacturers
and logistics providers around the world
Intelligrated
Business Challenges
Technology direction and applicability
Knowledgeable staff Open technology
Risk and downtime Total cost of ownership
Alignment between support strategy and business strategy
Maintain Manage
Ensure
ReduceMinimize
Know
Increasingly Challenging Environment
Uncertainty DriversTypes Examples
Regulatory Sustainability
Macro-Economy FX / Interest Exposure
Operational Ruthless Competitors
Commercial New Disruptors, i.e., Uber, Airbnb, etc.
Technology Future Technologies i.e., the Cloud
CFO CPO
Financial Performance External Spend Management
What CPOs need from CFOs What CFOs need from CPOs
Full Engagement – Accessible and Approachable Reduction of Material cost
Cost Accounting reflecting TCO approaches Visibility and control over non-compliant spend
Support for process automation Capex Mitigation of risk with suppliers
Clear scorecard and trusted results beyond PPV Working capital favorability – terms, inv.
Agreement on what good performance looks like Strategic support of insourcing / outsourcing
Understanding of where Procurement adds value Top notch supplier performance
Trust to manage spend to the maximum extent Use of TCO analysis
CFOs and CPOs share enterprise-wide transparency and influence
TCO – What is it?
• TCO models were first applied to computers by Gartner Research in 1987 for IT investments
• Notwithstanding, many companies still use part price as the prime component for negotiations with their suppliers.
• Systematically accounts for all costs related to a investment decision, or owning a product or service less any reclaim (resale/salvage value)
• Evaluates direct and indirect cost incurred throughout the entire product lifecycle, including:
• Procurement and deployment
• Operations and maintenance
• End-of-life management
• Cost of not upgrading (risk, opportunity, higher costs, etc.)
Get the Whole Picture
A Little Knowledge is a Dangerous Thing…
© Supply Chain Digest
What You Pay vs. What You Get
Understanding TCO and the inherent risks will help you obtain the optimal value for what you buy. BUT…
• Do you own all the prime elements of TCO? NO
• Does your cost system reflect TCO discipline? NO
• Do you fully utilize your suppliers’ resources? NO
Value equates to total benefit less total costs. Therefore, step back and look at the big picture. Long-term.
• Does an eAuction outcome conducted in Asia equal best value? NO
• If you just bought a vacation package, does your cost end there? NO
We need to cast the net out further:
• What are your total costs?
• What are their total costs?
• Quantify the activity and the opportunity
Reduce Operating Costs Example
• Look at all your costs, not just the service agreement
• Compare impact to production (reliability / optimization)
0
50
100
150
200
250
300
350
Self-Maintain Out-Task Out-Source Manage
Prod. Impact
Support
Parts
Inventory
Labor External
Labor Internal
Analyze Your Options Closely
Tip of the “Priceberg”
Why Should We Care About TCO?
Plant Management
Plant Personnel
Board & Exec Mgmt
Recession Hits
Banks Withhold
Analysts Criticize Mgmt
Customer affected & puts the squeeze on
Suppliers Squeezed
Cost Pressures Never End
Staff gets nervous
Why Should Suppliers Continuously Improve?
If they continue to innovate, they will have to pass through the cost reduction.
If they continue to cut costs, they will see reduced profit.
On the other hand,
What’s their business case for a price premium?
When factoring in TCO, that premium could now translate to:• the lowest adjusted cost
• opening the door to identifying areas for improvement
• an opportunity to incentivize the supplier to out-perform the contract
Take the first step. Talk about waste. Talk about redundancy. Talk about non-value add. But don’t talk about price concessions.
End
-of-
life
Man
agem
ent
• Risk planning
• Part impact; assembly mapping & impact
• Component tracking
• Customer alerts lead-time away
• Drawing/BOM updates
• Removal & disposal
• Hazmat/REACH
• Transition inventory
• Last-time buy
• IOS avoidanceO
per
atio
ns
& M
ain
ten
ance
• General maintenance
• Cyber & physical security
• Repair
• Software upgrades
• Hardware upgrades
• Change management
• Backups
• Parts replacement
• Parts availability
• Floor space
• HVAC/power
• Proficiency training
• Auditing/asset tracking
• Downtime
Pro
cure
men
t &
Dep
loym
ent
• Engineering & design
• Equipment including initial spares
• Software
• Implementation
• Documentation
• Installation (material & labor)
• Integration with adjacent systems
• Factory testing
• Site testing
• Commissioning
• Change-over time
• Initial operations & maintenance training
Direct and Indirect Costs Need to be Considered
Application of TCO
Two Key Areas of Focus
• Extend Lifecycle
• Reduce Operating Costs
TCO = ∑NPV (Deployment+ Operating
Costs + End of Life Management)
Blend of Capital and Operating Expense Budgets
Extend Lifecycle Example
System 1: 10-year estimated life• Acquisition $700K
• Operating expense $30K per Year
• TCO = $1M or $100K per year
System 2: 30-year estimated life• Acquisition $700K
• Operating expense $33K per Year
• TCO = $1.7M or $57K per year
System 1: 10-Year Expected Life
System 2: 30-Year Expected Life
Operating Cost
28%
Acquisition Cost
72%
Operating Cost
60%
Acquisition Cost
40%
Applied Lifecycle Duration Changes TCO Significantly
TCO = ∑NPV $700K + ($30K * 10 years)
System 2 is 43% lower TCO/year
TCO = ∑NPV $700K + ($33K * 30 years)
Does it Work?
MAPI reported that companies that managed spend using a Total Cost of Ownership methodology had a 35% higher net operating margin, and that companies with a TCO methodology are twice as likely to enter into pay-for-performance contracts with a supplier, almost twice as likely to realize at least 90% of savings that were agreed to with a supplier, and more than seven times as likely to get supplier quotes with one or more TCO components.
Basic product characteristicsMarket / Customer geographies
Customer constraints
ManufacturingStrategy
Plantcapability
TotalCost
LaunchSite
• Understand basic product / supply chain parameters
• Identify if there are any limiting factors in the site selection process from a customer pointof view (e.g. ITAR, customer “NOs” etc.)
• Understand lead time and inventory options
• Apply total cost model to validate plant selection,or make plant selection in case there are options(working capital considerations, also)
• Final launch site defined
# sites (example)
6
3
3
1
1
13
• Make or Buy approach • Select preferred launch site(s) based on overall
manufacturing strategy, incl. “why not China/MX”(unlimited capacity assumption)
• Identify individual plant / supplier receiving capacity / process capability against given SOP date
Mfg Site Selection Process for New Products
Customer Importance:• High • Medium• Low
Technology Clockspeed:• Fast• Medium• Slow
Profit margins:• High• Medium• Low
Competitive position:• Advantage
•Parity• Disadvantage
Key business strategy:• Main focus• Medium• Low
Process Product
Make Buy
• Make/Buy decisions are driven by the Total Cost Model and Core/Non-Core
• Just because something is non-core does not mean is should be outsourced
- Non-core items should be outsourced if the TCM is less expensive
- Impact on the Total Cost of other make and buy components should be considered in the analysis
• Just because something is Core does not mean that it can not be outsourced
- Core items can be considered for outsource if Toyota can maintain the appropriate level of design, quality and lead-time control at a lower TCM
• Combination of quotes and actual outsourcing experience will be used to estimate costs
Core/Non-Core Analysis & Make/Buy Decision Process
Discussion focuses on a pricingmodel—instead of just price
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