What is Total Cost of Ownership (or TCO)?

Dec 02, 2021 by Mark Dingley

Do you need to lower your TCO? Having reliable product ID & inspection equipment can help -find out how here!

And how does it affect Australian manufacturers?


It should come as no surprise that the Australian manufacturing industry exists in a highly competitive business climate. This challenges businesses to find creative ways of lowering their costs without compromising their goal of producing high-quality products. All whilst maintaining the required regulatory and compliance standards as well.

Delivering sustainable competitive advantages through investment in core business competencies and optimising the management of non-core activities is therefore more important than ever before.

Life-cycle management of your capital assets and the equipment that supports your business operations is one such core activity. This is achieved by optimising your total cost of ownership, or TCO.

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Direct and Indirect Costs

TCO is a concept that is used to represent all the costs – both direct and indirect – that are associated with owning capital assets. It covers the whole life of the equipment, from acquiring it through to maximising its operation, then maintaining its performance, and finally determining when is the right time to dispose of it.
Direct costs are those that are (usually) planned within a budget; where purchase orders and invoices occur. These costs are, therefore, easier to identify and track than their indirect counterparts.

Indirect costs, on the other hand, are typically hidden and therefore not included in the budget. This combines to make them more difficult to measure and quantify. They’re often not factored into the equipment’s TCO and, even if they are factored in, they’re rarely monitored over the life of the equipment in order to ensure that it meets your original expectations.

Purchasing a labelling machine, for example, is a direct cost – as is the cost of servicing. If it has a return-to-base warranty, however, the shipping costs tend to be indirect – as is the downtime that occurs when the machine is out of action.

Direct TCO Points to Consider

These are some of the direct costs that you need to consider when it comes to coding and labelling equipment:

  • Capital;
  • Consumables over the period;
  • Corrective maintenance;
  • Installation costs;
  • Routine maintenance;
  • Service contracts; and
  • Spare parts.

Indirect TCO Points to Consider

These are some of the indirect costs that you need to consider when it comes to this equipment:

  • Cost of disposal;
  • Downtime (if the equipment breaks down);
  • Downtime due to routine maintenance;
  • Financing costs (if it’s a lease or rental);
  • Operator training;
  • Shipping (if the servicing is return-to-base); and
  • Training time.
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Being Proactive with TCO Costs

Businesses will be able to increase the performance of their equipment and improve the productivity of their workforce by understanding the associated life-cycle costs of equipment ownership. This will also help them to save money and improve their bottom line. By implementing strategies and tactics that are effective and proactive, you will be able to optimise costs over the four-phase life-cycle of the equipment – that is acquisition, operation, maintenance and finally disposition.

Some of the strategies that businesses can use to minimise their TCO and maximise their ROI include:

Questions that managers should also ask themselves include:

  • Are our operators trained on using all equipment in our range?
  • Are we buying and standardising the best equipment on the market?
  • Are we leveraging our purchasing power and volume?
  • Do we know if it will cost more to service a particular piece of equipment than it would to purchase a new machine?
  • Have operators received correct training?
  • Have we compared the ownership of equipment between manufacturers to determine if we’re getting the best value for money? and
  • How many different suppliers are we managing?

If the answer to any of the above questions is “no”, then you have hidden costs to contend with. By rationalising your asset base and reducing the number of suppliers that you do business with, you’ll be able to eliminate many of them. These activities will maximise your purchasing power, increase operator performance, as well as reduce some of the administrative and management burden that is experienced.

Keep in mind that each decision made in each of the equipment’s life-cycle phases will have an impact on the other factors. Businesses who successfully look at TCO from a holistic viewpoint will improve their profitability as well as maintain a competitive advantage of the competition.

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