Written by: Inchainge | 2 minute read | Last updated on: October 7th, 2021
When buying new equipment, the price tag only tells you part of the story. Energy costs, maintenance, and repair fees are often several times higher than the initial price! But often these are left unconsidered and hold nasty surprises further down the line. Calculating the Total Cost of Ownership is an important step when planning new investments.
There is an anecdote amongst sailors about sailboats that says: “The only good times are when you buy it, and when you sell it”. This seems to indicate that the ownership itself is enjoyable, but may have some drawbacks too. Calculating all potential costs a new purchase may tag along include not only the initial price, but its operation, maintenance, downtime, output, and longevity – all of these factor into the Total Cost of Ownership and are always dependent on the specific purchase made.
The importance of TCO
The general idea is, that whenever there is a purchase, you need to consider more than the costs or the investment at the moment of the transaction. Ownership and usage of a particular piece of equipment, a product or a service has a cost too. These costs can vary considerably between the choices that are available.
When evaluating alternatives when it comes to making a purchasing decision, buyers should look not just at an item’s short-term price, the so-called purchase price. But, buyers should also look at its long-term price, or rather its Total Cost of Ownership (TCO). The item with the lower total cost of ownership is the better value on the long term.
How is TCO calculated?
Originally the term TCO was taken into consideration when companies and individuals were looking to buy assets or make investments in capital projects. The final purchase decision was based on the calculation of adding Capital Expenditures (CAPEX) on a major purchase, that will be used in the future, with Operating Expenditures (expenses, OPEX), that represent day-to-day usage costs.
TCO and the supply chain
Looking at TCO through a supply chain lens has broadened its meaning. In supply chain management, the total cost of ownership of the supply delivery system is the sum of all the costs associated with every activity of the supply stream. The main insight that TCO offers to the supply chain manager is the understanding that the acquisition cost is often a very small portion of the total cost of ownership.
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