If you’re reading this, you already understand what Total Cost of Ownership (TCO) is. You’ve read a ton of different definitions and even looked up a few formulas. So, we get it – you get it. We won’t waste your time explaining and defining a concept that you’re already so well versed with. But, we do want to briefly discuss just why TCO matters so much.
The answer is simple: TCO matters because no two products or services are exactly alike. TCO ensures that your organization is getting the best bang for its buck in addition to adhering to procurement criteria and meeting department goals. It is imperative that your comparison goes beyond the initial price tag and into the realm of additional and hidden costs, such as maintenance and repair, operational costs, any expected downtime, production and human productivity costs. Taking things one step further, you should also compare suppliers and weigh up any monetary or resource incentives they can provide along with the product or service you’re after.
Furthermore, analyzing purchases from a TCO perspective ensures that you’re looking at the cost of a product/service further down the line, when the actual cost presents itself. Focusing only on the initial price or even the costs incurred during the first month or so is a great disservice to the actual value that the procurement department can bring to the organization. An aggressive analysis allows you to minimize TCO and provide significant cost savings to the organization, so long as internal stakeholders are on board with the plan. (For ideas on how to manage internal relationships, check out a guide on Improving Procurement’s Internal Credibility.)
So, pull out those bids, sit down and ensure that when you’re comparing products and services, you’re going straight down the line from the initial cost all the way through to the depreciation schedule. That way, you know what the real cost will be a year or two out and what the value will be five to ten years from now, because as you know it all plays in the TCO.
For more on TCO, read
"Total Cost of Ownership: How Do You Figure It Out?"
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