Why Total Cost of Ownership (TCO) Matters in Machining
Total Cost of Ownership (TCO) is a concept that has been associated with supply chain management and manufacturing for decades. The idea is that the cost of owning a product over its lifespan is broader and more encompassing than simply the initial price paid. Generally speaking, TCO is comprised of two main cost categories: the costs associated with purchasing a product, often referred to as Total Cost of Acquisition (TCA), and the costs associated with operating and maintaining the product through the life cycle.
It is imperative that companies understand TCO, TCA, and operating costs in order to have a clear picture of cash flow and the expected spend profile over time – leading to optimal capital and expense funds management. TCO matters in machining as it enables OEMs to assess purchasing options based on a comprehensive view of costs – without incurring any “surprise” expenses along the way. The purchase price alone does not determine a good investment as low purchase prices may lead to maintenance and longevity issues – creating a higher TCO in the end.
Key Acquisition Costs to Consider
Acquisition costs include more than the purchase price. As a general rule of thumb: TCA costs are upfront expenses including the initial purchase price as well as any costs incurred to get the product to the point of use. Below are some common acquisition costs beyond the purchase price.
- Logistics & Transport: the logistics and transport activities may be straightforward or very complex. The costs may include packaging, warehousing, freight rates and shipping, and delivery fees. Import fees and insurance costs should also be included.
- IInstallation: once the product arrives on site, there may be installation, testing, or commissioning costs to factor into the TCA.
- Managing Inventory: inventory management costs should also be included in TCA estimates as optimal inventory levels lead to lower warehousing and transportation costs. Conversely, inefficiencies within the inventory management system affect overall cash flow and lead to higher TCA.
- Overhead: every TCA includes some degree of overhead costs.
- Margin Stacking: each member of the supply chain typically adds a layer of cost or profit margin, a process referred to as “margin stacking”. OEMs should minimize the number of suppliers in the supply chain, removing the “middle man” and leading to significant savings. This is why it pays to partner with a machine shop, like ABS, that offers a complete manufacturing solution. Our team starts and ends the project with you – from the concept and design phase through production, sub-assembly and final assembly operations.
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Key Operating and Maintenance Costs to Consider
Operating and maintenance costs are the other major component of TCO and are typically easier for OEMs to estimate. Operating expenses should include labor and the utilities/energy required to operate the equipment. As for maintenance, expenses that should be factored into TCO estimates include labor, replacement parts, and the necessary parts or tools. Assumptions will need to be made for maintenance intervals and durations and it is important to include the impact on production during the equipment downtimes for maintenance activities (i.e., lost production cost).
Various personnel costs may also need to be included in TCO calculations. While personnel costs may be categorized as acquisition or operating costs depending on the nature of the activity, it is important that OEMs account for these expenditures somewhere in the TCO estimate. Examples include time spent on purchasing (including research and vendor selection, order placement, expediting, and on-going vendor communications), logistics support, accounting, initial and on-going training for personnel as well as 3rd party or in-house technical support.
How Total Cost of Ownership Often Leads to Reshoring
At ABS, we know the value of a robust supply chain. Many OEMs are relocating manufacturing closer to home to strengthen their supply chain – a process known as reshoring. Reshoring is simply bringing manufacturing back from overseas. Over the past several decades, many North American OEMs transitioned manufacturing offshore, typically to locations in Asia such as China, to take advantage of perceived lower costs and other anticipated benefits. While some costs such as labor may be lower with offshoring, many OEMs are realizing that reshoring is a much more competitive and attractive option when total cost of ownership and brand reputation are considered.
When it comes to reshoring, ABS delivers superior quality, streamlined logistics, less inventory on water, and excellent proximity to the U.S. and Canada – all of which provide OEMs with more control over their supply chain. Read our brief article about the value of reshoring manufacturing to North America for more information.
Your Machining and Fabrication Partner
Established in 1971, ABS Machining has grown to become the recognized global leader in large machining, fabrication, and assembly for OEMs. We offer CNC machining and fabrication services at our state-of-the-art facilities that serve markets across North America including several locations throughout the United States.
The key to our success has been exceptional people, unparalleled facilities, and an unwavering commitment to quality. Our people are experts in their given field. Their expertise is matched only by their passion for serving our clients. We continue to invest in our people with education programs, cross training and in our internal accredited apprenticeship center. Our facilities are equipped to serve our client’s requirements in:
Our massive fleet of machines and automated welding systems has delivered solutions to the most technically challenging projects. Our commitment to maintaining unparalleled facilities is evidenced by our renowned continuous capital reinvestment initiatives. Our commitment to quality goes well beyond our ISO 9001:2015 Registration. From the inception of all programs, ABS quality professionals work closely with each customer to ensure all their unique requirements are met or exceeded. It is this commitment that has positioned ABS as a strategic supplier to leading OEMs worldwide.
Contact us today to see how we can help with your next project, or give us a call at 1-844-227-6224.
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