How much do you know about TCO? Are you using it to your best advantage?
For many companies, Total Cost of Ownership (TCO) has a significant influence on buying decisions and supports negotiations from customer and supplier perspectives. It allows companies to look deeper than the purchase price when deciding whether or not to buy.
At its core, TCO is a financial estimate and procedure that estimates all the costs associated with an asset. Acquisition costs are included along with every direct and indirect cost throughout the asset’s life cycle: assembly, production, warehouse, distribution, administration, and more. When you estimate TCO, you can identify known cost-drivers and hidden costs before you make the decision to invest.
Different TCO procedures have been recorded since at least the 20th century. However, today’s understanding of TCO dates back to 1987, when the consulting company Gartner Group developed and promoted TCO to assess costs for IT infrastructure. In the decades since, TCO has been approved and adopted globally.
Many different methodologies and software tools have been developed to analyze TCO in a variety of different contexts and industries. No matter the methodology or the application, the goal of TCO is always to understand and reproduce the true costs of acquiring an asset.
Total Cost of Ownership is very versatile. It can be used in many different contexts across different industries. Companies and individuals can estimate the TCO of any purchase that they make: anything from a person buying a new car to a large enterprise purchasing software to be used around the globe.
Bossard focuses on TCO where it applies to C-parts—screws, nuts, washers, and other small but essential parts that are handled in bulk.
TCO helps you save time and labor costs in the following ways:
TCO increases organizational transparency and responsibility in the following ways:
There are two levels when calculating the TCO: cost categories, and cost elements (also known as cost drivers). Depending on the case at hand, you will have different cost categories and cost elements and you may structure these levels in different ways. Common cost categories are listed below, and most cost elements will fit into one or more of these categories.
There are 6 cost categories to calculate the TCO, according to Ellram and Siferd (1993):
Even though TCO offers tremendous benefits in nearly any situation, there are issues that can come about during its implementation, especially if the concept is foreign to those within your organization.
The main problem comes about when a company tries to copy a TCO model from another company. Due to the multiple complex factors that go into a TCO evaluation, it simply is not effective to copy a model from another company. That is why we don’t include a sample model here.
There are other issues that can come about when trying to introduce TCO to a company. Employees must be educated and trained, internal operating processes may need to be changed, and conflict within the existing corporate culture may occur.
If there aren’t enough data sources and systems to help determine the cost elements, that creates another hurdle to TCO implementation. And, the time it takes to complete the total cost of ownership evaluation can be an issue as well.
Despite the issues, we believe that TCO is an important part of the decision-making process. Efforts should be made to mitigate the problems associated with TCO implementation so that your company can reap its benefits.
Ellram, L. M., & Siferd, S. P. (1993). Purchasing: The Cornerstone of the Total Cost of Ownership Concept.