For most of us, the purchasing process is relatively simple: find the cheapest product/service, make the purchase and then move on to the next task. However, this is a risky tactic. Too frequently the simple, short-term approach of only considering the price results in a purchase that ends up costing much more than expected, especially if the item fails prematurely, turns out to be less efficient than expected, or requires more time to install or maintain than anticipated. Though many buyers are using life cycle costing as a decision-making tool, its use is still far from widespread. Nor are many buyers using life cycle costing to inform important decisions − this needs to change.
So what is life cycle costing?
Life cycle costing (LCC), also called whole life costing, is a technique used to establish the total cost of ownership. The initial cost of any purchase represents only a small proportion of the total cost of ownership. LCC can be used to produce a spend profile of the product or service over its anticipated life-span. The accuracy of LCC analysis diminishes as it projects further into the future, so it is most valuable as a comparative tool when long-term assumptions apply to all the options and so have the same impact on each one.
In many companies, different departments hold the responsibility for acquisition cost and subsequent support funding and that means there is little or no incentive to apply the principles of LCC to purchasing policy. That’s why it’s so important that you consider how to implement life cycle costing.
What are the benefits?
There are four major benefits of LCC analysis:
1. Option evaluation. LCC techniques allow you to evaluate competing proposals on the basis of through-life costs. They enable you to look at asset procurement in a more strategic way and to level the playing field when choosing among competitive bids, as the lowest-priced bid may or may not signify the least costly asset to procure.
2. Improved awareness. Application of LCC techniques provides an improved awareness of the factors that drive cost and of the resources required by the purchase, allowing you to focus on the areas that matter most. Awareness of the cost drivers will also highlight areas of existing purchases that would benefit from review.
3. Improved forecasting. The application of LCC techniques allows you to estimate the full cost of a procurement more accurately. This leads to improved decision-making at all levels, from major investment decisions to the establishment of cost-effective support policies.
4. Performance trade-off against cost. In purchasing decisions cost is not the only factor you should consider when assessing the options. There are other factors, such as how well the product/service matches the requirements, the quality and the level of service to be provided. LCC analysis allows for a cost trade-off to be made against the varying attributes of the purchasing options.
In summary, including LCC concepts in the procurement process can result in a more cost-effective purchasing decision. Even when a comprehensive analysis is not done, it is good practice to inject LCC into the discussion for a more comprehensive approach to the procurement process.
I hope this post has given you a clearer idea of what life cycle costing is and how useful it is.
Life cycle costing (LCC), also called whole life costing, is a technique used to establish the total cost of ownership. The initial cost of any purchase represents only a small proportion of the total cost of ownership. LCC can be used to produce a spend profile of the product or service over its anticipated life-span. The accuracy of LCC analysis diminishes as it projects further into the future, so it is most valuable as a comparative tool when long-term assumptions apply to all the options and so have the same impact on each one.
In many companies, different departments hold the responsibility for acquisition cost and subsequent support funding and that means there is little or no incentive to apply the principles of LCC to purchasing policy. That’s why it’s so important that you consider how to implement life cycle costing.
What are the benefits?
There are four major benefits of LCC analysis:
- evaluation of competing options,
- improved awareness of total costs,
- more accurate forecasting of cost profiles,
- performance trade-off against cost.
1. Option evaluation. LCC techniques allow you to evaluate competing proposals on the basis of through-life costs. They enable you to look at asset procurement in a more strategic way and to level the playing field when choosing among competitive bids, as the lowest-priced bid may or may not signify the least costly asset to procure.
2. Improved awareness. Application of LCC techniques provides an improved awareness of the factors that drive cost and of the resources required by the purchase, allowing you to focus on the areas that matter most. Awareness of the cost drivers will also highlight areas of existing purchases that would benefit from review.
3. Improved forecasting. The application of LCC techniques allows you to estimate the full cost of a procurement more accurately. This leads to improved decision-making at all levels, from major investment decisions to the establishment of cost-effective support policies.
4. Performance trade-off against cost. In purchasing decisions cost is not the only factor you should consider when assessing the options. There are other factors, such as how well the product/service matches the requirements, the quality and the level of service to be provided. LCC analysis allows for a cost trade-off to be made against the varying attributes of the purchasing options.
In summary, including LCC concepts in the procurement process can result in a more cost-effective purchasing decision. Even when a comprehensive analysis is not done, it is good practice to inject LCC into the discussion for a more comprehensive approach to the procurement process.
I hope this post has given you a clearer idea of what life cycle costing is and how useful it is.