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Total cost of ownership: definition & important aspects for buyers
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Total cost of ownership in a nutshell:
Total cost of ownership (TCO) comprises all direct and indirect costs incurred over the entire life cycle of a product or service. This is an essential evaluation tool for purchasing, as it provides a sound basis for procurement decisions and supplier comparisons over and above the pure purchase price.
Example: When purchasing a forklift truck for EUR 25,000, an additional EUR 15,000 is incurred for maintenance, EUR 12,000 for energy, EUR 8,000 for insurance and EUR 5,000 for training over a useful life of 5 years, resulting in total operating costs of EUR 65,000.
Contents
What is the total cost of ownership?
The total cost of ownership (TCO) comprises all direct and indirect costs incurred over the entire life cycle of a product or service. This includes not only the purchase price, but also ongoing costs such as maintenance, operation, training, disposal and any downtime. The TCO approach offers a comprehensive view of the actual costs and helps companies to make well-founded procurement decisions.
Key elements of the total cost of ownership
Significance for purchasing
Consideration of the total cost of ownership plays a decisive role in the procurement process. It enables companies to look beyond the purchase price and consider all cost factors that influence profitability. Through TCO analysis, buyers can realize long-term savings, uncover hidden costs and develop a more sustainable procurement strategy.
Total cost of ownership: From price-oriented purchasing to total cost of ownership
Based on an understanding of the total cost of ownership, it is clear that companies need to look beyond the purchase price alone in order to make economically sound decisions. In practice, however, price-oriented purchasing dominated for a long time, ignoring the long-term follow-up costs. This often led to unexpected additional expenditure and impaired overall economic efficiency. The shift towards a holistic view of the total cost of ownership is therefore essential in order to achieve sustainable cost savings and competitive advantages.
Old: Price-oriented purchasing
Traditional approach: In traditional price-oriented purchasing, the lowest purchase price was at the center of all procurement decisions. Purchasing departments focused on short-term cost savings through tough price negotiations with suppliers. Tools such as simple price comparisons and discount analyses were the main instruments. However, hidden costs such as higher operating expenses, regular maintenance or rapid depreciation were often overlooked. As a result, the actual total cost of a product exceeded the initial savings and impacted the company's profitability.
New: Total Cost of Ownership
Total cost of ownership: The modern approach goes beyond the pure purchase price and considers all costs incurred over the entire useful life of a product or service. Company
Conclusion on total cost of ownership
Total cost of ownership is an indispensable tool for strategic purchasing decisions. TCO analysis enables companies to look beyond the purchase price alone and consider all relevant costs over the entire life cycle of a product. Despite the challenges of data collection and the complexity of the calculations, the consistent application of the TCO approach leads to more sustainable and economical procurement decisions. With increasing digitalization and AI-supported analyses, the TCO approach will become even more precise and efficient.
