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- July 28, 2005 -


Forget TCO – Think Total Value of Ownership

  SCDigest editorial staff

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Concepts and Templates for Total Cost Ownership (TCO) for Software Applications and Other Technology Tools.

In a recent issue of Optimize magazine, authors Jerry Luftman and Hector Miller present some ideas for sorting out the value of the equation, on Total Value of Ownership (TVO). While focused on IT projects generally, we included this summary because the piece includes some interesting ideas that may be used by supply chain related managers for their potential projects.

Luftman and Miller argue that TVO should be based on three inter-related principles:

  • Portfolio management: Projects must be viewed in total and prioritized. The authors offer a simple but interesting “dashboard” for viewing this portfolio of projects that would be useful for a list of potential supply chain projects, as well. It includes such factors as “must do” (because of some outside force), expected return, probability of success and total cost.
  • TVO Governance: This involves linking potential projects to the corporation’s overall strategies and objectives. The authors suggest a three-step model that starts with identifying the company’s overall business goals, followed by defining the business change required to meet those objectives. Finally, the technology enablers required to achieve the business change are identified. Perhaps surprisingly, it is often found that potential projects not closely related to the company’s business objectives are on the table. The authors briefly discuss how Frito-Lay and the trucking company, CR England used this approach to select which supply chain projects to pursue.
  • Company Options: Using the first two steps and available resources, the company (or by extension supply chain organization) selects which projects will be accepted and breaks each project into manageable pieces.

In addition to providing some useful tools for consideration, the authors argue that too often the focus of potential project analysis is ROI or return of cost, rather than their total value to the company or organization.

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