Aspects of Total Ownership Cost - Assignment Example

Total Ownership Cost Total Ownership Cost This paper aims to investigate total ownership cost from different perspectives. For instance, when a company is operating in a business where it can conveniently produce large quantities through the use of robotics in machinery department then business expansion becomes easier. This also facilitates in acquiring government contracts for distinctive products. However, in this case the company is required to consider other significant factors including cost estimate relationship, engineered cost estimate method, life cycle costing, design to cost, independent production cost variable and cost-reimbursement contracts along with its troubles. All of these elements shall be discussed in this paper so as to gain greater insight about mass production and total ownership cost. 1. Analyze differences between the Cost Estimating Relationship (CER) method and the Engineered Cost Estimate method and which approach to Life-Cycle Costing (LCC) would be best for the business. Cost Estimating Relationship method fundamentally relates to the use of statistical techniques in order to estimate the cost of one or more than one independent variables, for instance, software lines and weights. More specifically CER is helpful in developing a mathematical relationship between cost and an independent variable through different quantitative techniques. In general circumstances Cost Estimating Relationship is used before developing the actual products while on the other hand this usually has higher level of cost estimate system. The cost estimate levels are important to consider because of various unknown details about the project (Abid, 2005). In contrast to this, Engineered Cost Estimate Method which is also known as Empirical Cost Estimating or Detailed Estimating largely relates to the estimation of various skills, experiences, knowledge, personality traits etc. It is also the most time consuming technique of estimation while the accuracy level is usually not proportionate to the time spent. However, it does facilitate in establishing instructions for business operations which later help in performing different jobs (Charkiewicz, 2011). Hence the basic difference between CER and Engineered Cost estimate is that one is associated with quantitative techniques whereas latter is categorized as the qualitative measure. Cost Estimate Relationship generally has six steps such as defining the dependent variable which is to be estimated, selecting the independent variables to conduct tests and data collection. Subsequently the relationship between dependent and independent variable is analyzed while selecting the best predicted relationship. The results are then documented (Abid, 2005). On the other hand Engineered Cost Estimate method has number of unknown variables which makes the estimation process significantly difficult. For instance, it requires machine downtime allowances, differences in personality, correct allowances for efficiencies, delay and fatigue (Charkiewicz, 2011). Hence Engineered Cost Estimate is significantly intricate as compared to Cost Estimate Relationship as in the former case majority things are dependent upon estimator’s intellect. Moreover, Engineered Cost Estimate is found useful in industries which primarily function in screw machinery because here feeds and speed consumes the manufacturing time (Charkiewicz, 2011). Conversely Cost Estimate Relationship works well in manufacturing spacecraft sensors (Abid, 2005). Life Cycle Costing (LCC) is a highly productive tool for environmental accounting. These play an important role in decision making while considering large scale environmental problems. However, they have limited use in the building industry. Broadly there are different approaches concerning Life Cycle Costing which makes it significantly appropriate for making responsible decisions related to environment (Gluch, 2004). Here, it is important to consider that LLC approaches do not facilitate irreversible decisions which might occur when dealing in environment industry. LLC approach particularly associates with the lifecycle perspective. Therefore it is not only dependent upon investment costs rather it also considers operating costs which are identified in the estimated lifecycle of product. However, it does not incorporate all the environmental costs (Gluch, 2004). Considering this description Cost Estimate Relationship would be the best Life Cycle Costing approach especially when the business is dealing with government authorities to produce unique products. 2. Evaluate the design-to-cost (DTC) changes that have occurred in the government’s approach and how will it impact the ability to compete. Design to cost is the basic element of successful product cost management. This is supported by the fact that a significant part of product’s cost is actually calculated through its design and manufacturing (Crow, 2013). Hence it can be argued that design to cost is an effective management strategy which is used to produce a reasonably priced product. This is done through making the target cost an independent design variable which needs to be attained during the product development process. Following are the fundamental elements of design to cost which will subsequently help in comprehending the changes in government approach (Crow, 2013): Design to cost requires clear understanding of customers’ purchasing power and the requirements of competitive pricing. Subsequently the target cost is established and allocated straight to the level where costs are managed effectively. This usually relates to the hardware costs. Commitment is required by the personnel who is directly involved in the development process. This is important to analyze the target costs and budgets. High management is required to maintain stability and also to balance the requirements according to the customers’ purchasing power while avoiding unnecessary elegance. Usually government uses cost plus approach while implementing the design to cost strategy. However, this has been changed to fixed price contracts which have subsequently caused the cost overruns while increasing competition among different manufacturing organizations. This has also impacted the profit margins of different companies while forcing them to leave the business (Gilb, 2011). Hence in order to better compete with other organizations the management will have to critically analyze the functions of fixed price contracts when implementing design to cost strategy. 3. Analyze the role of cost as a key independent variable in the production of very unique products. Cost as an Independent Variable is a distinctive philosophy which relates to acquisition and integration of successful business practices. Moreover, it helps in achieving superior standards, reasonable prices, extensive capabilities etc. CAIV particularly associates with the philosophy of treating cost as an independent variable among three other variables including cost, performance and schedule (Land, 1997). These are usually used in the defense acquisition programs. The role of CAIV in the production of unique products is to allocate an independent variable which influences other variables to depend upon it. More specifically other variables respond to the stability forced by the independent or fixed variable. Apart from this it also helps in recognition of the best time to decrease life cycle costs. For example, it can influence the management to allocate development funds so as to save significant production costs when the program moves to subsequent phases (Land, 1997). Cost containment is a significant aspect of CAIV similar to the schedule and performance. Hence this is detection that it might be an essential requirement of tradeoff for some constituents of performance parameters. This helps in staying within previously established objectives concerning product costs. Here, it is important to notice that performance parameter tradeoff does not reflect that the weapons system which has been obtained will eventually fail to meet the community requirements concerning the military operations. However, it means that a particular method for achieving those constraints would not be possible (Land, 1997). 4. Determine which element(s) of cost-reimbursement contracts tend to produce the biggest troubles for a specific company and why? In order to identify the elements of cost-reimbursement contracts which largely impact specific companies while creating significant troubles for them it is important to first understand the structure of cost reimbursement contracts. Hence following is the brief description about three fundamental elements of cost reimbursement contracts (Omar, 2009): Estimated Cost: This is primarily given by the contractor in the course of bid process. Estimated cost help in analyzing the overall price of different products and the customer affordability. Ceiling Price: It is provided by the owner which cannot exceed beyond a specific limit. It might also be similar to contracts based upon fixed price. Moreover, ceiling price gives the final compensation figure. Actual Cost: This represents the final cost of the project once it is completed. On the basis of the nature of contractual agreement, few of them might include a separate section for sharing the savings with service provider or contractor. This can be done through a predetermined percentage stated in another agreement (Omar, 2009). Above explained elements of cost-reimbursement contract might create troubles for different companies depending upon the intention of contracting parties. For instance, the risk allocation is defined in the contracts which actually need critical attention from both parties in order to successfully complete the project (Omar, 2009). Fixed price contracts are found to assign cost risk excessively upon the contractor while on the other hand cost-reimbursement contract creates more troubles for the owner. This can be substantiated on the basis of the fact that cost reimbursement contracts assign the risk values to the owner while keeping all other values constant, for instance, site condition and quality. Moreover, it is hard to find any cost reimbursement contract which does not have disallowed costs, ceiling price or the sharing mechanisms (Omar, 2009). In addition to this when the contract include agreements and mechanisms, for instance, ceiling price or provision of cost sharing then the risk is reallocated to the contractor. Hence ceiling price tends to produce biggest troubles for a company which uses robotics in the machinery department while dealing with government authorities. This issue can be resolved through using GMP contracts which are considered a type of cost reimbursement contracts. These are usually helpful in handling the changes within ceiling price (Omar, 2009). References Abid, M.M. (2005). Spacecraft Sensors. England: John Wiley & Sons. Charkiewicz, T. (2011). Cost Estimating Methods: Empirical, Comparative, Statistical and Standards. Retrieved May 6, 2014, from MTI Systems. Crow, K. (2013). Achieving Target Cost / Design-To-Cost Objectives . Retrieved may 6, 2014, from DRM Associates. Gilb, T. (2011). Estimation: A Paradigm Shift Toward Dynamic Design-to-Cost and Radical Management. Software Quality Professional , 25-38. Gluch, P. &. Baumann, H. (2004). The life cycle costing (LCC) approach: a conceptual discussion of its usefulness for environmental decision-making. Building and Environment , 571 – 580. Land, J. (1997). Differences in Philosophy—Design to Cost vs. Cost As an Independent Variable. Program Management , 24-28. Omar, S. (2009). Identifying The Risk In Cost Reimbursable Contracts. The Pennsylvania State University , 1-60. Read More