'Total Cost of Ownership' methodology becomes more sophisticated
4 mins read
The notion of 'Total Cost of Ownership' (TCO) was a common sense reaction to the increasing flow of electronics manufacturing to the 'low cost geographies'. With low real estate costs and wage rates two orders of magnitude lower than in developed countries, the developing world could offer prices that won many contracts, whether based on end product or price per placement or any other such metric.
TCO was the beginning of the formulised argument that this price was irrelevant to the final cost unless certain other aspects were taken into account, like the costs involved in shipping, time delays, repeatedly making engineering change orders (ECOs), product recalls, tax and legal requirements and many, many others.
Whilst many of the arguments about the true TCO have been resolved – resulting in high volume consumer electronics being manufactured overseas and low volume, high complexity products being made on home turf – there remains a slight trend for 'reshoring' and also a better understanding of TCO and its applicability to every project.
One of the reasons for an increased recognition of the TCO is that a product is usually more than an item that is produced and delivered – it is increasingly something that needs to be supported not only throughout its life, but also through the end of life process.
This philosophy is at the heart of the systems employed by EMS provider Plexus in its bid to achieve the lowest total cost of ownership (LTCO). Bill Fitzgerald, Plexus Engineering Solutions' VP for Global Business Development, commented: "It's not that Plexus has pioneered the concept of LTCO itself, but rather Plexus has pioneered a comprehensive and systemic approach towards achieving LTCO via its Product Realisation Value Stream."
Plexus' value stream is broken down into six parts: conceptualise; design; commercialise (take design into production); manufacture; fulfill; and sustain. It is the interaction between all of these components – potentially from the earliest phases of product conception – which brings LTCO to life. Fitzgerald makes the comparison with a project that might have made the move from concept to design through a design consultancy, without taking into account the other components of the value stream. "When we get involved with customers in supporting that conceptualisation effort, we are bringing in engineering, bringing in manufacturing, bringing in test, to participate in that process. The output of that phase has started to look at the implications for that product further on down the road."
LTCO refers to the lowest total cost of making, using, maintaining and refurbishing a product through to the end of its useful life. The goal of LTCO requires product innovators, designers and manufacturers to take the longest, broadest possible view of costs incurred over the lifetime of a product, so as to capitalise on both revenue producing and cost avoiding opportunities that arise over the long term. It demands a comprehensive mindset and methodology throughout all phases of a given product's lifecycle.
However, calculating LTCO is not as simple as putting some numbers into a standard spreadsheet. Fitzgerald explained that the accuracy or appropriateness of LTCO estimates starts with considering all of the costs associated with the product, including those that are readily apparent and easily characterised (such as manufacturing unit costs) and those that may be hidden and more challenging to understand (such as anticipated service/sustainability costs). He added: "While it is hard to imagine that LTCO estimates will always be fully accurate, they can be reasonably modelled and validated and can therefore provide valuable insights."
LTCO is also a mindset or what Fitzgerald says is a belief that if Plexus is asking the right questions and engaging with customer right at the beginning of the product realisation system or at any point along the way. "If those questions relate to understanding the total cost," he noted, "then we have an opportunity to minimise that cost. It is a philosophy; a process."
The strength of the process comes from Plexus' engineering solutions service offering, the front end of the value chain that covers the conceptualisation, design and part of the commercialisation components of the value stream. Even if the customer presents a completed design, Plexus will run the design through its 'Design for Excellence' tools and come up with suggestions about manufacturing yields, serviceability or reliability. Based on these, it could offer alternative options for PCB layout or even the product design itself, in order to bring down the LTCO.
In some cases, LTCO analysis may involve the customer having to spend more money than originally planned, or create a more expensive design. "The customer's approach might not be the best choice, given other costs associated with this product down the road," claimed Fitzgerald. It may be that, from a manufacturing standpoint, there might be more labour and/or more testing, or from the sustainability standpoint, it could incur higher serviceability costs.
Another aspect is that LTCO is not just a single exercise at the beginning of the project – it needs to be an ongoing discipline. While this can provide evidence of the efficiency of the design and manufacturing processes, it also can accommodate disruptive influences. Components inevitably become obsolete at some point and the cost and availability of replacements needs to be factored in. But the customer's product, in which the EMS company has a vested interest, will also have a certain life span. Fitzgerald said: "Accordingly, we provide our customers with a thorough understanding of various aspects of the total cost of ownership for their product, which is an essential component to determining if and when a product is headed towards obsolescence and what the financial impact might be."
More positive disruptions could include technologies that improve how the product functions, reduce its BoM or make manufacturing easier or the product more reliable.
While the benefits of LTCO are, theoretically, obvious, can they be quantified? Fitzgerald said: "Taking the time to understand fully the total costs of ownership creates opportunities to achieve LTCO. If you are at the beginning of the product development cycle and you don't ask all the right questions, it is hard to gauge what the real cost of ownership for that product will be.
"But if you believe that best practice is to undertake that diligence throughout the process, you can come out at the other side with the confidence that the product cost – although it is always possible that something may be missed along the way – is as low as can be."
