Total Cost of Ownership

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Include any cost associated with an asset. Explanation of Total Cost of Ownership.

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What is Total Cost of Ownership? Description

The Total Cost of Ownership (TCO) method is a technique which can be used to make sure that all associated costs over a given time period are considered when you are acquiring an asset. Some examples of assets are: a building, software or a truck. TCO can be described as all costs of owning and operating an asset over time. TCO does not only reflect the costs of purchase. It also includes all other aspects in the further use and maintenance of the asset.
 

Origin of Total Cost of Ownership. History

TCO was originally developed in the late 1980s by research company Gartner to determine the cost of owning and deploying personal computers. Their initial findings were that PCs cost an enterprise nearly $10,000 per year. At that time this caused an upheaval among financial managers and IT directors.

 

Calculation of Total Cost of Ownership. Formula

There is no broad accepted formula for TCO. The main thought behind is that you need to consider all relevant costs which are related to an asset. The following list contains typical cost elements of Total Cost of Ownership. Purchase price. Installation costs. Financing costs. Commissioning costs. Energy costs. Repair costs. Upgrade costs. Conversion costs. Training costs. Support costs. Service costs. Maintenance costs. Downtime costs. Safety costs. Productivity costs. Risk costs. Disposal costs. Which factors should you use? This depends upon the industry where the asset will be used and the characteristics of the asset. (Software, computers, buildings, automobiles, equipment, plants, etc).

 

Usage of Total Cost of Ownership method. Applications

Any purchase of a significant asset, that needs a comprehensive analysis of long-term effects and hidden costs.


Strengths of Total Cost of Ownership. Benefits

  • Obviously it is sensible to consider ALL costs when an asset is acquired.
  • TCO is a long-term measure, and reduces the total costs over time.

Limitations of Total Cost of Ownership. Disadvantages

  • The effort that is needed to do a TCO analysis.
  • Performing a TCO analysis has itself a cost.
  • No general formula exists.
  • TCO does not offer help for the valuation of intangible assets.
  • Sometimes it can be difficult to determine whether, and to what extent, certain costs must be allocated to an asset.
  • Because TCO is a long-term measure, it reduces costs over time. If you have to cut cost immediately, TCO is not very useful.
  • Generally, TCO does not assess the risks that are involved with a purchase of an asset.
  • TCO is not very helpful to align investments with strategic goals.

Total Cost of Ownership Forum
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  Total Cost of Ownership PhD
I would like to know whether there is anyone that did a PhD on TCO management? I am currently working on my PhD and my topic is "understanding the impact of TCO within any organization on the organizational structure of supply chain, engineering and...
     
 
  Total Cost of Ownership for Software
Interesting and helpful insight to determining TCO - we are embarking on the TCO of our applications, not only for charge back / costing modeling, but for assistance in our application rationalization analysis....
     
 
  How can TCO contribute to Customer Satisfaction?
How to use this tool as a customer satisfaction initiative?...
     
 
  Total Cost of Ownership in Mining
Has anyone done any work with TCO for Capital Equipment in the Mining industry?...
     
 
  Training Needs Analysis
Dear all, is there a comprehensive tool that can be used for assessing training needs for all levels of employees? Thanks, Bulisa...
     
 

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Effects of providing total cost of ownership on attribute weights in purchasing decisions

In this paper we investigate how the provision of total cost of ownership (TCO) information affects attribute weights in sourcing decisions, and how t...
Usage (application): Purchasing, Complexity, Cost, Evaluation
 

Total cost of ownership as a tool for inter-firm cost management

In today’s environment, communicating what your products and services are worth to customers’ business has never been more important. Customers increa...
Usage (application): Inter-Firm Total Cost of Ownership
 
 

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Compare with Total Cost of Ownership: Cost-Benefit Analysis  |  Activity Based Costing  |  Net Present Value  |  Discounted Cash Flow  |  Free Cash Flow  |  Business Intelligence  |  Payback Period


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