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Transcript of 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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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
Change inConsumption/
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
NETWORK PRINTER COST COMPONENTS
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
NETWORK PRINTER COST COMPONENTS
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
Change inConsumption/
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
$50K
Status QuoScenario 1 -
Low quality withfull replacement
Disposal of Roof(End of Life Costs)
Acquisition(Acquisition Costs)
Minor Repairs(Lifecycle Costs)
RoofReplacement
(LifecycleCosts)
Initial
Roof(PurchasePrice)
Status QuoScenario 2 -
Low quality withpartial replacement
Disposal of Roof(End of Life Costs)
Acquisition(Acquisition Costs)
Minor Repairs(Lifecycle
Costs)
Major Repair(Lifecycle Costs)
RoofReplacement
(LifecycleCosts)
Initial
Roof(PurchasePrice)
Status QuoScenario 3 -
Low quality withpartial overlay
Disposal of Roof(End of Life Costs)
Acquisition (Acquisition Costs)
Minor Repairs(Lifecycle
Costs)
MajorRepair
(LifecycleCosts)
Initial
Roof(PurchasePrice)
High Quality Roof20 - year
InitialRoof
(PurchasePrice)
Disposal of Roof(End of Life Costs)
Acquisition(Acquisition Costs)
Minor Repairs(Lifecycle Costs)
ROOFING SCENARIOS 20-YEAR LIFETIMECOST COMPARISON
($ 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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Questions?