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TCO: Definition & important aspects for procurement specialists
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TCO in a nutshell:
Total Cost of Ownership (TCO) refers to the total costs of a product or service over its entire life cycle, including purchase, operation, maintenance and disposal. For procurement, TCO is an essential tool for holistic cost assessment that goes beyond the pure purchase price and enables well-founded make-or-buy decisions.
Example: When purchasing a production machine for EUR 100,000, an additional EUR 45,000 is incurred for maintenance, EUR 80,000 for energy, EUR 25,000 for training and EUR 10,000 for disposal over a useful life of 10 years, bringing the total TCO to EUR 260,000.
Contents
What is the Total Cost of Ownership (TCO)?
In purchasing, the total cost of ownership (TCO) refers to the total costs associated with the purchase and ownership of a product or service over its entire useful life. In addition to the actual purchase price, indirect costs such as operation, maintenance, energy consumption, disposal and possible downtime are also taken into account. By considering the TCO, companies can carry out a holistic cost-benefit analysis and thus make well-founded decisions that go beyond the purchase price alone.
Core elements of the TCO concept
Importance of TCO in purchasing
In strategic purchasing, the consideration of TCO enables a comprehensive evaluation of procurement decisions. By analyzing all costs incurred, buyers can realize long-term savings and identify hidden costs. This leads to more sustainable procurement, optimized supplier selection and improved risk management. In addition, the TCO concept helps to make the case for investments that have higher initial costs but are more cost-efficient over their lifetime.
Whitepaper: TCO (Total Cost of Ownership) - Holistic cost analysis for well-founded investment decisions
TCO (Total Cost of Ownership): From traditional cost analysis to a holistic TCO approach
The Total Cost of Ownership (TCO) enables companies to record all the costs of a product or service over its entire life cycle. Building on the theoretical understanding of TCO, it is essential in practice to look beyond pure procurement costs in order to make well-founded economic decisions. The need for this transformation stems from the realization that hidden follow-up costs can have a significant impact on overall profitability.
Old: Traditional cost analysis
Traditional approach: In traditional procurement practice, the focus was mainly on the lowest purchase price. Companies used simple calculations to compare offers, often only taking into account the direct acquisition costs. Tools such as basic spreadsheets or simple cost-benefit analysis were used. However, this approach neglected indirect costs such as maintenance, operation, training or disposal. The result was unexpected expenditure down the line, which more than offset the initial savings and led to budget overruns.
New: Total Cost of Ownership (TCO) analysis
Total Cost of Ownership (TCO): Modern TCO analysis integrates all costs incurred over the entire life cycle of a product or service. By using specialized software and data analyses, operating costs, maintenance costs, downtimes and disposal costs are recorded in addition to acquisition costs. Innovation-promoting technologies such as AI and machine learning enable more precise forecasts of future costs. This leads to a holistic view that uncovers hidden costs and ensures long-term economic benefits. Companies benefit from better investment decisions, optimized total costs and increased competitiveness.
Practical example: TCO in the IT sector
A medium-sized company was faced with the decision to purchase new server hardware. The traditional method would have led to the purchase of the cheapest model for 50,000 euros. However, a TCO analysis was used to evaluate ongoing energy costs, maintenance contracts and service life. The analysis showed that a higher priced model at €70,000 had a total cost of only €80,000 over five years due to energy efficient technology and longer life, while the cheaper model came in at €110,000. The decision in favor of the more expensive model therefore led to a return on investment of 30,000 euros over the period of use.
Conclusion on the total cost of ownership (TCO)
The TCO analysis is an indispensable tool for strategic purchasing decisions. It enables a holistic cost assessment over the entire life cycle of a product or service and prevents costly wrong decisions based purely on acquisition costs. Increasing digitalization and AI-supported analysis tools will make TCO calculations even more precise and efficient in the future, leading to better procurement decisions and sustainable cost savings.
