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?"
Sign up to our newsletter
Company Reports to the Rescue: Four Uses for Supplier Data in Procurement
Company-specific reports, also called supplier profiles or vendor assessments, contain valuable supplier information that supports vendor management and guides decision making.
Three Reasons to Consider Mexico for Your Next IT Outsourcing Project
Procurement professionals looking to make a change in their IT sourcing strategy, particularly small and midsize companies, should consider Mexico for several reasons. Learn more …
Lessons Learned from Three Major Procurement Blunders
When a procurement mistake occurs, it can be an opportunity to learn how to do things better next time. To proactively prevent future mistakes in your organization, learn and grow from others’ mistakes.