The Importance of Total Cost of Ownership in Supply Management

The Importance of Total Cost of Ownership in Supply Management


As Ray learns in the opening vignette, purchase price is only one component of the cost of purchasing material, a product, or a service. TCO should be a permanent concept in every supply management professional’s mind in a service, retail, or manufacturing firm. Overemphasis on acquisition cost/purchase price frequently results in failure to address other significant ownership and post-ownership. Total cost of ownership is a philosophy for understanding all supply chain-related costs of doing business with a particular supplier for a particular good or service.


Typical ownership cists include those associated with processing inventory, repair, maintenance, warranty, training, operating, inventory carrying, contract administration, and downtime cost for operating equipment. Post-ownership costs may include those for disposal and environmental cleanup. The addition of risk and its associated costs adds yet another dimension. These costs and others must be estimated and included in a total cost analysis.


TCO is relevant not only for a firm that wants to reduce its cost of doing business but also for a firm that aims to design products or services that provide the lowest total cost of ownership to end customers. For example, some automobile manufactures have extended the tune-up interval on many models to 100,000 miles, reducing the vehicle operating cost for car owners.


TCO analysis draws from a variety of academic disciplines, such as finance, accounting, operations management, marketing, information technology, and economics. The best and, perhaps, only way to address all relevant costs is to employ a cross-functional team representing the key stakeholders.


Supply management personnel can facilitate the TCO analysis by combing their broad-based analytical skills with those of other team members to ensure that all relevant costs are considered. A brief examination of each type of business together with supply management’s vision and role in minimizing total costs is a good place to begin.