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Strategic Sourcing Spend SEGMENTATION, Cross Functional TEAMS, ANALYSING: TCO / Lifeycle Costs, Supplier Market, Item Characteristics and Supplier Costs. OPPORTUNITY Brainstorming, Sourcing STRATEGY Development.

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Old 01-03-2007, 12:48 PM
bob bob is offline
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Default Analysing Lifecycle cost

a lot of my work is in establishing agreements for provision of indirect services. When comparing the total cost of alternative bids I usually apply a notional cost to non incumbents to allow for the cost of transition to a new supplier. However it is difficult to actually determine what the transition cost is.
Does anyone have any suggestons/comments about how to determine what the cost should be.


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Old 01-08-2007, 05:03 PM
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Default Re: Analysing Lifecycle cost

Hi Bob,

I don't have a standard formula that you could use but here are some ideas (in my opinion): (by the way if the current incumbent is having a negative effect on the total cost involved, I assume you would be comparing that to the new total TCO of the new suppliers)..

I would go about calculating the costs involved as follows using a combination of standard TCO Principles and Activity based Costing:

My Major Headings would be:1,2 and 3 as indicated below.

1. Selection Costs:Costs relating to Selecting a new supplier: What are the process steps involved in selecting a new supplier? e.g Shortlist, Assessment, Selection, Adjudication etc.


2. Engagement Costs: Costs of engaging with the new Supplier. Onboarding, Training, Setting up in your systems, Setting up the service, Setting up of Communication etc.


3. Disengagement Costs: Are there any costs in disengaging with you old supplier. (Panalties, removing form the system, removal of staff etc.)

I would calculate Step1, 2 and 3 using the following methodology:

1.1 Shortlisting:
People resources involved + Cost per minute / hour per resource (usually take the person's annual salary x 1.4 which will give you an overall idea of cost per compamy) x amount of time spent. = $ Y (Since your company does this fairly often you'll get a feel for small bids, medium +larger bids)
Material resources involved: Paperwork, Stationery, System etc.
1.2. Assessment: Same as above
1.3 Adjudication
1.4. Selection
1.5 Award

Add it all up should give the cost of Step 1.

Do same for 2 and 3.

My guess would be that you would come up with 3-4 different scenarios depending on the size / complexity of the bid.

Is profit made when you buy or when you sell?
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