Before you make a purchasing decision for your company, you likely analyze its price and overall benefits to your people, products, operations and commitment to quality. It's smart to examine the upfront expense of a new asset, but this isn't the only cost you should consider. In fact, every new piece of equipment has costs that may not present themselves until later in its lifetime. Analyzing total cost of ownership can help you evaluate your past purchasing decisions and make informed purchases in the future.
What is total cost of ownership?
Total cost of ownership is the amount of money you pay for an asset over its projected lifetime, including its initial purchase price and costs related to its maintenance over the years, licensing requirements to use the asset and more. TCO can tell you how much you have spent, will spend and should spend on your assets.
In many purchasing decisions, facility managers come across several models of a certain item that look similar but have a big price difference. Initially, it may seem frugal to choose the model with the lowest price tag, but if that item requires more maintenance, additional parts or other special purchases later on, the total cost of ownership will gradually increase.
What is TCO analysis?
TCO analysis is the process of evaluating the true lifetime cost of a purchase. There are many expenses associated with purchasing a new asset:
- Maintenance, including service and spare parts.
- Financing costs, such as interest payments.
- Operational costs, including fuel and other essential components.
- Licensing and administration.
- Asset depreciation.
- Opportunity cost, or the lost potential for a more useful purchase with the money spent on the asset.
- Upgrades or replacement expenses.
- Order processing and delivery fees.
To create a basic TCO analysis, list out each expense associated with an asset, then assign values. Be as thorough as possible; a Ernst & Young TCO study found that fleet managers, particularly those in charge of smaller operations, tend to overlook certain expenses, such as the opportunity cost of an item. Leaving these out won't give you a complete picture of an asset's total cost.
Once you have all your expenses listed and valued, add them up to see how much you are actually spending on an item. It's a simple task, but the results can be eye-opening.
Working with NMS to build an accurate TCO forecast
Conducting a TCO analysis on one asset in your fleet is a good start to calculating the total cost of ownership of your trucks and other equipment, but it's best to have an accurate idea of your TCO for all items in your operation. Doing this on your own by hand isn't always practical, but there are resources available to help you get the insight you need to make smart purchasing decisions.
When you work with National Maintenance Services, you receive information about total maintenance costs and usage data for your equipment, which will help build out an accurate TCO forecast. You can also review monthly cost-per-hour information for the assets in your operation. With this data, it's easy to create an accurate TCO forecast and make informed decisions about your critical assets. Contact NMS to learn more about how we can help strategize, reduce costs and improve efficiency.