approach to TCO was made based on a number of factors including the types of

Approach to tco was made based on a number of factors

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approach to TCO was made based on a number of factors, including the types of decision the organizations would be using TC modelling to support. In all of the case study organizations, the TC analysis results were used to support decision making rather than flowing to the organizations’ financial statements. Northern Telecom has a goal of using its model for product/service valuation in the future. This is contingent on implementation of an organization- wide approach to activity-based costing and total cost modelling. Table II. Comparison of relative advantages of dollar- based and value-based TCO models Model advantages Disadvantages Dollar-based – direct cost Tailor factors considered to decision Time consuming Very flexible Does not make sense for repetitive decisions Alter level of complexity to fit decision Not cost beneficial for low dollar buys Help identify critical issues Dollar-based – formula Easy to use once system is in place Time consuming to establish system Excellent for repetitive decisions where costs Formulae need to be periodically reviewed for key factors can be determined and updated Inflexible to different types of decisions Considers a limited set of factors Value-based model Can incorporate issues where costs cannot be Time consuming to develop; only good for determined important and/or repetitive decisions Considers the importance of factors using Much judgement in establishing weighting weightings Easy to use for repetitive decisions
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Total cost of ownership 15 Unique versus standard models The organizations studied tended to use unique models that are specially developed for each buy. These models may share a common set of total cost factors, such as quality, delivery and service. But the data need to be separately developed for each buy. Organizations chose to use a unique versus a standard type of model for a number of reasons, as shown: Factors which favour a unique model : buys to be considered vary greatly; no one set of factors captures critical issues across buys; desire for flexibility in cost modelling (adapting to user needs, adapting to various buys, adapting to changes in internal focus). Factors which favour a standard model: issues of concern are same across buys; desire for user-friendly/relatively easy to use model; desire to computerize the system; desire to analyse repetitive purchases. The key factor which determined the choice between a unique and a standard TCO model was the type of buy to be considered (see Table IV). In instances where an organization desired to analyze repetitive buys, or buys where the same cost factors were of primary concern across buys, a “standard” model was developed. This was the case for Northern Telecom, Texas Instruments and the SEMATECH capital model.
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