Total cost of ownership
The full cost of buying and using a part or supplier: piece price plus transport, duties, quality, inventory, tooling, admin and the cost of failures.
Also called: TCO, Total landed cost, Whole-life cost
The piece price is the part of the cost that is easy to see. Total cost of ownership (TCO) adds the rest.
A machined shaft quoted at €11.20 from a supplier in Asia against €13.50 in Europe looks like a clear choice. Add sea freight and duty (€1.10), six extra weeks of safety stock (€0.45 in carrying cost), incoming inspection because the first batches had issues (€0.30), and one air shipment a year when a container is late, spread over the volume (€0.60). The Asian part now costs €13.65, €0.15 more than the European one, which can also deliver in a week.
What usually goes in
- logistics, packaging, duties and customs brokerage
- inventory: safety stock, minimum order quantities, obsolescence
- quality: inspection, scrap, rework, warranty claims
- tooling and any one-off engineering cost
- the internal time to manage the supplier
Why it is underused
Most of these costs land in someone else’s budget. Freight goes to logistics, scrap to the plant, warranty to after-sales. The buyer’s scorecard often only shows the price, and purchase price variance rewards the cheaper quote.
TCO models do not need to be precise. A rough figure for each line, agreed with the people who actually pay it, is usually enough to stop a bad decision.