Interview questions

Describe how you have gained a good knowledge of purchasing methods and procedures including life-cycle costing principles, value analysis, and weighted-value methodology, as used in evaluating bids for a wide range of commodities and services.

The total cost of ownership is defined as the present value of all costs associated with a product, service, or capital equipment that are incurred over its expected life.

Purchase price: The amount paid to the supplier for the product, service, or capital equipment

 Acquisition costs: All costs associated with bringing the product, service, or capital equipment to the customer’s location. Examples of acquisition costs are sourcing, administration, freight, and taxes.

Usage costs. In the case of a product, usage costs are all costs associated with converting the purchased part or material into the finished product and supporting it through its usable life. In the case of a service, all costs associated with the performance of the service that are not included in the purchase price are usage costs. In the case of capital equipment, all costs associated with operating the equipment through its life are usage costs. Examples of usage costs are inventory, conversion, scrap, warranty, installation, training, downtime, and opportunity costs

End-of-life costs. All costs incurred when a product, service, or capital equipment reaches the end of its usable life, net of amounts received from the sale of remaining product or the equipment (salvage value) as the case may be. Examples of end-of-life costs are obsolescence, disposal, clean-up, and project termination costs.

Step 1. Map the process and develop TCO categories. Construct a process map from thetime a need for the product, service, or capital equipment is identified all the way through the life cycle. The activities that you identify will help to develop broad TCO categories.

Step 2. Determine cost elements for each category. Using the process map as a guide,identify the subcost elements that make up each TCO category. 

Step 3. Determine how each cost element is to be measured. This is a critical step. Themetrics must be determined to quantify each of the cost elements identified in Step 2. For example, to quantify the costs of sourcing labor, the hourly rate of the individuals perform-ing the sourcing activity and the amount of time they spend or will spend doing it will need to be known.

Step 4. Gather data and quantify costs. This is the most difficult and time-consumingstep. In this step, gather data for each of the metrics identified in Step 3 and quantify the respective costs. This requires information from various sources, including interviews, sur-veys, the A/P system, and other internal databases. If information from internal databases is used, make sure to validate the numbers. Input errors can sometimes cause the numbers generated by these databases to be significantly inaccurate.

Step 5. Develop a cost timeline. Construct a cost timeline for the length of the life cycle.Place each cost element quantified in Step 4 in the appropriate time period. Then calculate totals for each time period as shown in the example.

Step 6. Bring costs to present value. Computing the present value allows decisions to be made based on present dollars. This is important because a dollar spent one year from now is not worth the same as a dollar spent now. The value of money spent any time in the future will depend on the organization’s cost of capital. To calculate the present value, therefore, obtain the organization’s cost of capital from its finance department. Then calculate the present value of each total in the cost timeline by using a present value table or a financial calculator. The sum of present values for each time period represents the total cost of ownership.