Total Cost of Ownership
Think about it, when you buy a product, does the cost of it stop there? If you’re planning to buy a PlayStation 5, even if it works fine and never needs a repair, the amount you’ll end up spending on games and online subscriptions will exceed the cost of the console.
You’ll find the same thing in your business. Maybe you have a company car. You’ll spend thousands on the initial purchase, but the cost of fuel, servicing and repairs will steadily grow throughout ownership.
Do you account for these costs when you make decisions to purchase items for your business? Do you run risk and total cost of ownership analyses to decide on the right investment? If you do, you may well have invested in an electric vehicle (EV), which are more expensive upfront but have a much lower cost of ownership, as they’re cheaper to run, need less maintenance and appear to last longer. What did your company do? Perhaps we need to have a framework to help us find out about the true total costs of our purchasing decisions…
What aspects of the total cost of ownership should you be considering?
- Hidden costs
It’s essential that you understand the full picture of how much a product is costing you, especially when hidden costs account for 14%-60% of the purchase price. Perhaps you’ve already accounted for everything noted above. Are your suppliers 100% transparent about cost? Making sure you have a communicative supplier relationship built on trust that can help you overcome this kind of issue. There’s also a chance that if you’re purchasing a new system or tool, investing in staff training might be necessary so they can use it.
- Labour costs
We generally associate good procurement management with cost reductions. However, it could be that a particular investment requires more labour time, of which you’ll have to cover the cost of. Consider how much time will be taken up by your team because of the investment, and how much ROI you’re expecting. That way, you’ll be in a better position to decide whether it’s worth it.
- Lifecycle costs
This is where risk analysis is most important. Your purchase could incur unforeseen costs, such as repairs. To avoid these, a more extensive approach to product research comes in handy as a means of reducing risk. Again, good supplier relationships should result in your suppliers giving sound advice about which products are superior in cost, lifespan and performance.
- Financing methods
Are you paying for a product upfront, or are you paying for it in instalments? It doesn’t take a genius to realise the effects that interest rates, risks with cross-currency purchases and economic uncertainties can have on your overall cost of ownership. Mitigating for these factors will allow you to reduce risk and judge what investments are preferable over others. Don’t take unnecessary risks when you can’t confidently calculate how much it will cost your business.
Calculating the total cost of ownership is something every business has to consider if they’re going to be successful, low-risk and growing sustainably. However, there are always so many variants to consider that knowing where to start may not be so straight-forward. To find out more on the total cost of ownership, read our article here.
If you’re having trouble managing your total cost of ownership, get in touch. We can help you calculate your costs and offer practical solutions to see your business flourish.