The basic principle of total cost analysis is that managers should consider the total cost of all logistics activities instead of trying to reduce the cost of individual logistics activities so that real cost savings can be realized. Otherwise, cost reductions in one logistics activity can lead to cost increases in others, and this may result in increased total costs. Total cost analysis can be expanded to include all of the costs of ownership, not just those related to logistics. With total cost analysis, the goal is to compare the costs of doing business with the firm to those of doing business with a competitor and to show the customer the financial benefits associated with the
firm‘s higher service performance. For example, it is necessary to convert fill rates, lead times and on-time performance that are better than those of competitors to an inventory turn advantage and therefore lower carrying costs per unit.
Characteristics of Total Cost of Ownership
- Total cost analysis can be defined as minimizing the total costs of logistics including transportation, warehousing, inventory, order processing, information systems, purchasing and production-related lot quantity costs, while achieving a given customer
- Total cost analysis can be used to show the performance of logistics internally as well as externally.
- Reducing the total costs associated with logistics represents value creation for the company.
- Does not consider revenue implications of logistics related service.
- More time consuming since it has to be done on an individual customer basis.
- Requires access to cost information.
- Perpetuates the ‗myth‘ that logistics is simply a cost that must be reduced.