The Personal Website of Mark W. Dawson

Life Cycle Costs (a.k.a. End-To-End or Total Cost of Operation (TCO))

When concerning the economic impact of any product, you must factor in the life cycle costs of the product. To only examine a few stages will lead you to the wrong conclusion. The Life Cycle Stages of a product are:

1. Design
2. Development
3. Production
4. Utilization
5. Disposal

The design stage can consume substantial resources in labor and materials as you create the product. Given that the creation of a product goes through cycles of successful and unsuccessful efforts, it consumes labor and material in each cycle. This builds up depending on how many cycles are needed to design a completed product.

The development stage has a significant impact on labor and materials. You need to obtain or contract for the raw materials need to produce the product. You may also have to sub-contract for the parts that go into the product. Factories for these parts have to be created or modified to produce the parts required, and an assembly line will need to be developed to create the finished product.

The production of the product requires warehousing of the materials or parts and the operational cost of the factory or assembly line. This usually consumes a great deal of the economic impact of the product life-cycle.

The utilization of the product is the warehousing of the finished product, its distribution to the consumer, the stocking of spare parts and service centers, and the actual cost of using the product (especially in the energy costs).

The disposal of a no longer utilized product also costs in labor and material. Think of old cars, appliances, computers, batteries, buildings, houses, etc., etc., etc... They need to be transported and disposed of at the appropriate location. And if there are environmental impacts of doing this disposal, the cost of disposal increases. A discontinued product can also have an impact on the discontinuance of a factory or assembly line. The costs of shutting down the factory or assembly line, and disposing of their contents, can and will impact the Life Cycle cost. And if there are environmental impacts of shutting down the factory or assembly line, this disposal cost will increase.

A good businessperson will factor all these stages into the Life Cycle cost in determining the price of the product. Not only are there these Life Cycle costs, but a businessperson has to factor in the overhead of administrating the business into the price. This overhead has a myriad of items that need to be accounted for (much too many items to outline in this observation). This is known as the Total Cost of Operation of a product.

So, when you look at a price of a product, remember the Total Cost of Operation when you think that the price of an item is too high or outrageous. It usually isn’t.  A businessperson wants to sell as many of the products as they can to turn a greater profit, and one of those ways to accomplish increased sales is to keep the price as low as possible. But they must turn a profit, or they may go out of business or discontinue the product.

A Note on Energy

Energy makes the world go around. Everything that is done requires energy. Whether it be electrical, heat, chemical, or biological, all activities require energy. Most of our energy comes from five main sources; oil, coal, hydroelectric, nuclear, and food and drink. Other sources of energy are solar, wind, geothermal, and others, but this accounts for only a small percentage of our energy needs. And the costs of producing the energy required to do something must also be accounted for. You often need to convert one form of energy into another to produce energy (i.e., electricity from heat), and raw materials are needed to start this conversion process. But the harvesting of these raw materials also requires energy, as well as having environmental impacts. The cost (and energy) of minimizing or cleaning up environmental impacts must also be accounted for in the energy process. And the energy cycle goes around and around, and energy must be accounted for in all life-cycle costs.

The scientific laws of thermodynamics also inform us that converting one form of energy to another cannot be 100% efficient, as some energy will be lost in this conversion. And all this production and utilization of energy cost money. This money must be accounted for in the price of all products and services.