IDIS 424 Lect 5-9 Flashcards
Total Cost of ownership
Estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle
Cost elements in TCO
- Cost of goods
- Acquisition costs
- Usage Costs
- End-of-life costs
Cost of goods
Invoice amount paid to supplier
Acquisition Costs
Costs of bringing product to buyers location
Usage Costs
Conversion and support costs such as inventory, scrap, warranty, installation, training, downtime, lost sales costs (opportunity costs)
End-of-life costs
Net of amounts received / spent at salvage such as obsolescence, disposal, cleanup, and project termination costs.
Opportunity Costs
Cost of the next best alternative
Factors considered in TCO
- Use for Larger Purchases
- Obtain senior management buy-in
- Work in a team
- Focus on the big costs first
- Obtain a realistic estimate of the life cycle
TCO Model Overview
- Considers cost of goods, usage costs, acquisition costs, end-of-life costs
- Calculated present worth of total costs over lifecycle
- Suggested only for capital equipment / large investment
What is inventory?
raw materials, work in process products, and finished goods that are considered in the portion of the business’s assets that are ready or will be ready for sale
Inventory
- Generally largest asset in a company
- One of the most important assets of a business
Inventory Management
- Avoid stock-outs
- Avoid Excess and Obsolete Inventory
- Move goods Efficiently
- Maximize Profit Margins
Inventory Related Costs
- Order Cost
- Holding Cost
- Stock-out Cost
Order Cost
Fixed cost (K)
Cost of company facilities, maintenance cost of computer system used, and cost to prepare purchase order
Order Cost Equation
Order Cost = K + cQ
c =
cost (price) per unit
Q =
order quantity
Holding Cost
Also known as carrying cost, the sum of all costs that are proportional to the amount of inventory physically on hand at any point in time
Costs associated with holding costs
Physical space to store, taxes and insurance, breakage, spoilage, deterioration, and obsolescence, Opportunity cost of alternative investment
Holding Cost =
h * average inventory * time length
h =
holding cost $ per unit per year
Average Inventory =
Area / t2-t1
Stock-out Costs
The cost incurred when stock-outs take place
Stock-out Costs include
- Cost of emergency shipments
- Change of suppliers with faster deliveries
- Substitution to less profitable items
- Cost in terms of loyalty or the general reputation of company
ABC Analysis
Stratification of items into A B C categories
A items
- Critical for the company
- Fast-moving and typically lower value
- Significant impact on your service levels and customers satisfaction rate
B items
Typically mid-range in inventory value and order frequency
C Items
Low moving and high inventory value
Inventory Stratification Methods
ABC analysis, Sales Method, GMROII, Hits method
Just-In-Time
Makes inventory readily available to meet demand, but not to a point of excess
EOQ
The optimal order quantity that minimizes total cost of ownership while meeting all demand
TCO =
Order Cost + Holding Cost
D =
units per day
h =
inventory carrying cost (holding cost) / per unit per year
c =
purchasing cost
T =
Q/D
Quantity Discount
Financial incentive to encourage a buyer to purchase goods in multiple units or in large quantities
Why offer Quantity Discount?
Allows sellers or manufactures to reduce inventory by selling more units
- Saves on shipping costs
- Helps to compete with rivals
- Helps lock in customers
All Units:
discount is applied to all the units in an order (10% off 5-10 books)
Incremental
applies a discount only to units ordered above a specific price tier ( buy one for 100, second is 95)
