When making purchasing decisions, companies often focus primarily on direct purchasing costs. But to paint a complete financial picture, it is important to consider the Total Cost of Ownership (TCO). This includes all costs associated with a product or service throughout its entire life cycle.
What does TCO include?
TCO is not limited to just the purchase price. It takes into account both direct and indirect costs. Direct costs are things such as purchase, installation and licensing costs. These are often easy to identify and clearly stated by suppliers.
Indirect costs: The hidden challenges
In contrast, indirect costs are often less visible but can be substantial over time. This includes maintenance, staff training, parts replacement and lost productivity during breakdowns or outages. These costs can creep up and have a significant impact on the budget.
A practical example: Importing machines
Suppose a company decides to purchase production machinery from a low-cost supplier in China. The purchase price is noticeably lower than that of European suppliers. However, once delivered, it appears that the machine requires regular maintenance. Additionally, the parts are not available locally, resulting in additional shipping costs and wait times. Add to that the cost of training staff to use this particular machine, and the initial savings can quickly turn into higher expenses in the long term.
TCO in the context of international sourcing
Within the world of sourcing, and in particular in international purchasing, TCO plays a key role. An offer from Asia with low initial costs may seem tempting. However, when elements such as transport, customs duties, quality controls and possible reshipments are taken into account, that bargain can prove to be a lot less advantageous.
The benefits of understanding TCO
By embracing TCO, companies are encouraged to look beyond the short term. It allows them to get a holistic view of what a product or service really costs, helping them make informed and sustainable purchasing decisions.
Investing in real value
It is not just a matter of cutting costs, but of investing in real value. A good understanding of the Total Cost of Ownership ensures that companies not only save money initially, but also benefit from their investments in the long term without being faced with unpleasant financial surprises.
