Assignment:
The total cost of ownership is a helpful decision making tool that is not implemented in all businesses. This is because they do not know how to set up to formula or have the manpower to dedicate to this extensive research. Data collected for total cost can help businesses understand and measure their sustainability. Putting together a perfect model may take time, but it will help managers with making decisions that affect the company as a whole. Also, it will help companies face their challenges and avoid risks. What do you think the most important A was and how can a company use it to benefit their capital and avoid risk?
The four A's of Total Cost Data:
Actual- When dealing with domestic and foreign suppliers, using actual data is the most reliable category in total cost data. It requires unit prices and all other elements involved in a shipment to be calculated in order to determine the amount that was paid.
Approximations/averages- This data would be determined based on estimates. Basically, if an organization doesn't have the time to calculate actual data, they would use estimate the cost of the shipment, or as a shortcut, use previous data to determine what the average cost has been previously.
This approximation could be under or over the actual data cost and do more harm than good. "A wide dispersion of true costs around an average cost creates a concern that the average charge may not reflect reality. It is always a good idea to know the standard deviation of a data set to understand the dispersion of occurrences around a mean. Wide dispersions indicate potential issues with averages." (Trent, 2016)
Assumptions- This is the least reliable category in total cost data. Assumptions in total cost data are based off of outside sources that have established their own total costs, leading the supplier to believe that the total cost would most likely be the same for them.
Absent- "The challenge with any cost model is that, at times, the cost to collect data outweighs the value of the data. At other times the sheer number of possible cost elements that could be part of the model is overwhelming. And, at times, a company simply fails to include a relevant cost." (Trent, 2016)
I would encourage any organization to use actual data when determining the cost paid, rather than taking shortcuts. Since the unit cost never equals the total cost paid, it is important that organizations have a thorough understanding of how total cost works and how they can determine the total cost.
Resource:
Trent, R. J. (2016). Supply Chain Financial Management: Best Practices, Tools, and Applications for Improved Performance. J. Ross Publising.