Session 5 Exercise 3 Mini Case Report Make Or Buy TCO At Happyland Construction

Topics: Costs, Construction, Total cost of ownership Pages: 4 (943 words) Published: March 19, 2015
Executive Summary
Happyland Construction, an engineering firm engaged in the design and construction of oil shale plants, is building a new plant in Blissful Valley that requires the use of a new piece of equipment, a new crane. The GargantuLift 6000 crane model produced by Mega Corporation is the recommended crane by engineering, maintenance, finance, purchasing, and management staff. Senior management needs to decide whether it is more beneficial for Happyland Construction to purchase the crane outright from Mega Corp or subcontract (lease) it from Digger Construction. Both options require substantial resources and will affect future business. The figures presented by Sid, the chief purchasing officer demonstrated that it is less expensive to buy the crane directly from Mega Corporation than to lease it. The total cost of ownership for buying the crane is $14.52 million over 10 years’ period vis-à-vis $17.52 million to lease. (See Annexure 1 and 2 respectively) Issue Identification

Happyland is planning to spend a lot of its resources in the next 10 years in paying for the crane. The company is evaluating the TCO of the crane involved in buying or leasing the large piece of equipment. The purchasing analyst prepared a breakdown of all the costs involved in the two options available. The strategic decision will be made during a meeting between the CEO, the purchasing manager, and the finance director. Happyland management needs to be sure that the company will have enough projects and resources to compensate for this capital investment and that they make the correct decision based on the cost, their resources and needs. Qualitative Analysis

Happyland has grown over the last few years and became a world leader in the design and construction of oil shale plants. The company is building a new plant and in need to acquire a huge lift crane to support its operations at the new facilities. There is consent among all the technical, engineering, and administrative...
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