For a company or manufacturer, the calculation of every penny they need to spend is very important. That’s why it will be very important for them to know more about the origins of total cost of ownership (TCO). Let’s talk further about it and look forward to how to calculate it and its benefits for the company.
What is the Total Cost of Ownership (TCO)?
First of all, let’s talk about the definition of TCO itself.
Total cost of ownership is a calculation strategy for all of the costs of a product or service throughout its life cycle. When you talk about TCO, it means you will combine the direct and indirect costs.
Before you get more information about TCO, you need to know the origins first. The origins of total cost of ownership (TCO) come from the Napoleonic era. This is the time when engineers try to appraise the efficiency of cannons. They analyses the service life, repair needs, and other factors to find the TCO.
TCO was formalized by the US Department of Defense. They began to calculate their defense program spending. In the late 1990s, they shared the results with the public. After that moment, this calculation method became very popular and many companies from various industry sectors have used this calculation.
For the company, TCO is very important. Starting from the beginning, TCO is used to determine the margins and sales prices. This is an important step for the company to determine their production costs and sales prices that will benefit them.
To make it easier, you can understand TCO as a calculation method for direct and indirect costs.
So, it’s not only about the main purchase price. When we talk about TCO, you need to include the indirect or hidden cost of using the product or service.
Calculation of TCO needs some key elements. The total amount of TCO consists of many aspects. Starting from the purchase price, maintenance cost, usage cost, disposal costs, and so on. That’s why you need to be very careful when calculating this kind of expense.
Understanding the Total Cost of Ownership
Easily, TCO is developed to analyses the actual cost of purchasing. This is a cost for a company to buy and use a product or service from a supplier. Not only the purchase price, but also any additional costs.
The theory of TCO itself developed year by year. You can use the definition of TCO from Bill Kirwin as a standard. He said. “TCO is the total cost of acquiring, using, managing, and withdrawing an asset over its entire life cycle. ”
From Bill Kirwin’s definition, we all know that TCO is not only the direct cost. It’s not only about the price but also all the costs associated with the product or service. That’s why you will find the indirect cost or hidden cost in this calculation.
The Reason Why TCO is Often Undervalued
It was mentioned before that the total cost of ownership is often undervalued by the company. Even though it’s important, people usually overlook or undervalue this calculation. But, why is this happening? What is the reason TCO is often undervalued by the people in a company?
People usually count the price or value of a product by its physical appearance. Like an iceberg theory, people usually only care about the main price. In this case, the main price is the equipment purchase.
When you buy a bag, for example, You don’t really care about the value of the bag. What you really care about is the price. You will not have an interest in determining the cost that you will spend when using the bag. How much will it cost if the bag is broken and how long can you use this product?
Let’s take a coding and marking printer for a company as an example. This equipment is really needed for a company, especially in the manufacturing sector. When you buy this product, the company can’t only care about the purchase price. More than that, the company also needs to count the downtime, operating, part replacement, and, of course, the maintenance.
The Impact of TCO
Now you need to know the impact of TCO. Total cost of ownership, basically, will have a big impact on the company. That’s why it must be calculated well and never be undervalued.
First, TCO has a huge impact on determining the feasibility of a product or service. Like the coding and marking printer that was mentioned before, the TCO calculation will give you the best advice on how much this product will benefit your company.
Also, TCO will help you to identify the best product that is suitable with your company needs. The result of the TCO will show you how much the product is worth. Is it worth it or not? Does it help you to increase your productivity or not?
When you calculate TCO and get the result, you can evaluate and change the product if it’s totally not worth it. For example, your old coding and marking printer is not valuable anymore. Then you should choose the right one to replace it.
The LINX coding and marking inkjet printers will be the right ones. This product will help you save more money because the TCO calculation is very effective. This product has a value that will decrease the TCO, especially on maintenance and downtime. The LINX coding and marking printer has the best quality that will last when you use it regularly.
Example of Total Cost of Ownership
Now you know the origins of total cost of ownership (TCO) and its definition. Let’s talk further about the example! We can take a coding and marking printer as the product.
This coding and marking printer has an initial purchase price. But, besides that, you have to pay for another cost. This cost will be calculated as the total cost of ownership. It includes the cost of service, replacement parts, downtime (both scheduled and unscheduled), consumables, and energy.
Simply, the more you use the printer, the more it will cost you. You also need to calculate the hidden costs, like replacement of the aging equipment. The hidden cost will depend on the equipment’s product and its quality.
How to Calculate the TCO
But how can you calculate this TCO? Actually, it’s not that difficult to do. The first thing you should know before calculating is the 8 key elements of TCO. Here are the eight key elements that you will include while calculating this cost:
- Purchase cost (original cost plus supplier margin).
- Associated costs (packaging, customs duties, transport, etc).
- Acquisition costs (operation of the purchasing department).
- Cost of ownership (stock management, cost of depreciation, etc).
- Maintenance costs (spare parts, engineers, etc).
- Usage costs (operation, service, etc).
- Non-quality costs (deadline compliance).
- Disposal costs (resale, recycling, disposal, etc).
Clearly, the TCO calculation needs many aspects. That’s why you should know each aspect you need so the calculation of TCO will go right. This also helps you to realize that using a product or service is not only about the purchase price.
Remember that every product or service will give you a different TCO. That happens because the 8 key elements that are needed are different. So, you can’t compare one product to another product that is technically different.
How to Have an Effective TCO
From this explanation, it’s easy for us to understand that TCO should be minimized as much as possible. We need to make it more effective so the company will get full advantages. Here are the things you should do to make an effective TCO:
- Choose simple equipment with great quality and components.
- Make sure the equipment is easy to operate.
- Go for a product with a longer using time, so you can minimize the replacement cost.
- Examine the ability to service around the work schedule to reduce downtime.
After all, the best way to minimize your TCO and make it more efficient is by choosing a high-quality product. Make sure the product is suitable for your company’s needs. Like we talked about LINX coding and marking printers before.
The Benefit of Reducing TCO
It would be better for a company to reduce its TCO. Simply put, TCO is a cost that a company should pay. This is easy to say, but this cost will reduce the company’s money. If you want to save more money, then you need to reduce TCO.
But, what is the benefit of reducing TCO? It will help you optimize direct or indirect costs in many aspects. Also, this strategy will be very useful when you evaluate ROI (Return on Investment) and ROTI (Return on Time Investment). Reducing TCO also helps you improve long-term financial performance for the company.
It’s important for a company to understand the origins of total cost of ownership (TCO). If you can calculate the TCO well, it will be easier for you to optimize the company assets. Now, let’s start the TCO for coding and marking printers in your company for better operational management.
