Understanding Total Cost of Ownership

Total Cost of Ownership is a term that has been in manufacturing for decades. It refers to both the direct cost, which is how much was paid, and the indirect costs of an item. Indirect costs have typically been much more difficult to define, and encompass a variety of different areas that spread throughout the organization. These can include:

Freight – This is an obvious cost, but too often we find that freight costs get all rolled together and not factored into individual purchasing decisions.

Product Life – The longer lasting a product is the more valuable that it becomes. Not only does the usage decrease, which is a simple cost savings calculation, but this also positively affects several other costs.

Maintenance – Spare part cost, the frequency of maintenance needed, and the machines reliability all play a factor in how much it costs to run.

Procurement – Supply chain activity can be taken for granted, but there are companies that are more difficult to deal with than others. These that have logistical issues drive up the cost to get their product into their customer’s facility.

Production Value – How a part affects the overall production value can greatly affect what it’s worth. A more expensive part may enable entire process to be eliminated, other areas to run more efficiently, or an increase to take place that would have been otherwise impossible.

Operating – Depending on what the product is, it can cost more (or less) to operate the product with such factors and power usage, labor allocation, the products ease of use, or the need for training.

Storage – Some items require specific circumstances for their storage, which often are not met by the storeroom. This can lead to an increase in obsolescence or spoilage.

It is important for manufacturers to be cognizant of these cost and do their best to factor each of them in. Purchasing is never done in a vacuum, so buyers must understanding what each element of cost is and how they align with the companies goals so that they can make smarter decisions.
Martin specializes in being a supply chain partner who can help you look holistically at the entire operation and help you understand how different solutions will benefit you. Learn more about our Industrial Line of Business here, or contact us today to find out more.