In brief
Total cost of ownership (TCO) captures all costs of an asset over its life cycle, from purchase price through operation and failures to disposal.
Contents
What is Total cost of ownership?
The TCO approach supplements a pure price comparison with all costs associated with a purchase. These include transaction costs such as enquiry, purchase order and invoice verification, transport, customs duties and import charges, inspection and quality costs, warehousing and tied-up capital, installation, operating and energy costs, maintenance, failure and downtime costs, and disposal or residual value.
With technical components in particular, this shifts the assessment considerably. A cheaper part with a shorter service life, higher energy consumption or uncertain origin can be more expensive over its useful life than a higher-priced original. Conversely, an equivalent alternative with the same performance can save considerable costs.
For supplier comparisons, TCO is often simplified: instead of a full life-cycle calculation, the main cost drivers of a category are weighted and combined with the quoted price. How meaningful the result is depends on the underlying data. Process, storage and failure costs are often only estimated; these assumptions should be documented openly so that comparisons remain traceable.
In practice: maintenance and procurement
For spare parts, lead time and potential downtime costs belong in every TCO assessment. A part that can be delivered faster at a higher price is often more economical than the cheapest offer with a long wait.
Synonyms and abbreviations: TCO · life cycle cost (LCC) · whole-life cost · total cost of ownership analysis
Frequently asked questions
How do you calculate total cost of ownership?
You add up all the costs associated with an item over its service life. A common breakdown is into costs before the purchase (such as enquiry and qualification), at the purchase (price, duties, inspection) and after the purchase (storage, operation, energy, maintenance, breakdowns, disposal). For comparisons, the values for each alternative are set side by side; assumptions and estimates should be documented openly.
What is the difference between TCO and landed cost?
Landed cost comprises the purchase price plus direct procurement costs and minus discounts, i.e. the costs up to the point at which the item is available in the company. Total cost of ownership goes further and also takes into account follow-up costs during use, such as energy, maintenance, breakdowns, stockholding and disposal. A low landed cost can therefore go hand in hand with higher total costs.
Which costs are often overlooked in the TCO of spare parts?
Frequently underestimated are downtime costs due to long lead times, the effort for identification and enquiry, tied-up capital and storage costs when stocking, and costs for inspection and documentation. A shorter service life of cheaper parts or additional installation effort for alternatives that do not fit exactly also add up. These factors can clearly outweigh the price difference between two quotations.