Post Ownership costs

Post-Ownership Costs


In the past, salvage value and disposal costs were the major inputs required in estimating the post-ownership costs of capital purchases. Those costs could be estimated as cash inflows or outflows. For many purchases, there was an established market that provided data to help estimate reasonable future values, such as the Kelley Blue Book for automobiles. An appraiser of industrial equipment could help estimate the future worth of plant and equipment. Often companies made investments with absolute certainty of future application, although estimating actual appreciation required more information than was available. Today, supply management professionals must address these issues. In addition, three other factors with potential long-term impact must be addressed in performing a TCO analysis on equipment, a plant, direct materials, a product, or a service: long-term environmental impact, unanticipated warranty and product liabilities, and the negative marketing implications of low customer satisfaction.


            Environmental Costs


Gasoline stations in California have faced the unplanned expenditure of replacing their underground gas storage tanks with more environmentally friendly models. They also have been required to sanitize the soil near a tank if leakage has occurred. This expenditure has cost many independent operators their businesses, devalued their property, and increased the margin required on each gallon of gas sold to help recover such expenditures. This type of post-ownership cost is becoming more common as environmental problems persist.


            Warranty Costs


A poor designed and produced product may have unanticipated warranty-related costs. Tire tread difficulties that occur between 1978 and 1980 and again in 2000 resulted in that kind of problem for Firestone. In 2000, General Electric, in cooperation with the Consumer Product Safety Commission, recalled selected dishwashers manufactured between April 1983 and January 1989 to rewire a defective slide switch. After-sale costs such as replacements, returns, and allowances can accrue to service providers and retail companies. A well-trained supply management professional participation in a cross-functional team in product or service design may point out potential warranty/recall costs early enough that more emphasis is placed on designing and producing a defect-free and reliable product or service.


            Product Liability Costs


Companies engaged in all types of business have faced unanticipated product liability costs resulting from poorly designed and/or produced products and services: fuel tanks that explode on impact because of poor design; tires treads that separate as a result of poor design or manufacture, inferior materials, and/or improper inflation by end users; faulty ignition switches that cause cars to stall at inopportune moments; ground beef infected with the E. coli bacillus because of improper  processing; lawyers and accountants who have not performed their services according to professional standards; and retail outlets that sell defective merchandise. This list is long, and remedies usually require expenditures that often are note covered by insurance reimbursement.


            Customer Dissatisfaction Costs


Some 75 percent of field failures in consumer goods can be attributed to defects in purchased materials. Field failures lead to customer dissatisfaction. When a costumer is dissatisfied with a product, he or she frequently shares that dissatisfaction with many friends and acquaintances, some of whom may be potential customers. This flow of negative publicity frequently results in lost sales or “customer dissatisfaction” cost.