When it comes to making purchasing decisions for your company, the cost is always a top consideration. But, what should you be measuring when calculating cost? The total cost of ownership (TCO) takes into account all the expenses associated with owning and using an asset. It’s an essential metric to know for new purchases, as well as to help decide on the replacement of current assets. The total cost of ownership considers not just the initial purchase price, but also long-term expenses like maintenance and repairs. By understanding TCO, you can make an informed decision about which equipment is best for your business.
What is the Total Cost of Ownership?
To optimize asset management, you need to know what they cost. And, an asset’s cost extends far beyond its purchase price. Your business can determine which assets are most cost-effective by calculating their total cost of ownership. Using TCO, you can determine whether certain assets are costing you more to maintain than they ought to and whether it is time for a replacement. It isn’t inherently difficult to calculate TCO, but there are several factors to take into account and it is much easier to track with a Computerized Maintenance Management System (CMMS).
Why is TCO Important to Measure?
When you anticipate costs, you can better plan and spot potential issues before they result in downtime and production losses. TCO data can provide valuable asset management insight such as areas where your technician’s knowledge is lacking or where your maintenance program might need improvement.
How to Calculate an Asset’s Total Cost of Ownership
The TCO of an asset is the purchase price plus the operating and maintenance costs. The total cost of ownership is the total cost of purchasing, operating, and maintaining it over its useful life. For an accurate TCO calculation, make sure you include labor, parts, and vendor expenses when calculating the cost of maintaining your assets. This is why TCO is not complex to calculate, but it can be difficult. Many organizations realize they don’t have a proper system for tracking all of these expenses, as receipts and work orders stack up in paper files or spreadsheets. So, again, a CMMS helps organizations understand their asset costs and eliminates the countless administrative hours to calculate TCO.
TCO = Purchase Price + Operating Costs + Maintenance Costs
The Essential Pieces of Total Cost of Ownership
The operating and maintenance costs of every company will vary, but make sure you include everything you can to ensure you’re getting the most accurate number.
Calculate TCO using not only the initial investment cost but also include depreciation over time and warranty costs.
Keep in mind that you must account for every cost associated with operating the asset. This may include estimated electricity, fuel, insurance, registration fees, and other expenses.
For the most accurate TCO, ensure that your maintenance costs include:
- The Cost of Labor – The hourly rate of technicians multiplied by the total number of hours spent performing inspections and repairs, plus any third-party contractor costs.
- The Cost of Parts and Materials
- Total Downtime Cost – The number of hours the equipment is offline multiplied by the value of lost production.
Total Cost of Ownership vs. Asset Utilization
While the total cost of ownership gives you an idea of how cost-effective a single asset is, it is hard to compare the TCO of different assets. In most cases, you don’t use two assets the exact same way. You use some equipment more often, which would result in a higher TCO. Additionally, you may find it acceptable for an asset that is more critical to your organization to have a higher TCO than an asset that you use rarely. Adding asset utilization to the equation will help make a fair comparison.
How to Calculate Asset Utilization
If you want to calculate asset utilization, you must track each asset’s run time either in miles or hours. Also, it’s important to know both the date of purchase of the equipment and the date on which you began using it. Although these dates could be the same, an asset usually takes a few days to go online. Total time in service is the time from first use through today (or the date you retired it or took it offline). You can get the total cost per hour/mile by dividing the TCO by the total run time or total miles of each asset. Then, it’s easier to spot outliers once you know the average cost per mile or hour for different assets.
For example, if a piece of equipment has a TCO of $100,000 and has 2,000 hours of operational time to date, then that asset costs $50 per hour to run. So, a similar piece of equipment that carries a $70 per hour cost would stand out as a less cost-effective asset compared to your average of $50 per hour. Alternatively, your total cost per mile would be $1 if your vehicle traveled 100,000 miles with the same total cost of ownership. If your fleet average is $1 per mile, then you can investigate further any vehicle with a considerably higher cost per mile.
Other Factors to Consider When Looking at TCO
1) The Age of Your Asset
You’ll get a more realistic picture and a foundation for comparison if you take the asset’s age into account when calculating TCO. Even if both assets have the same run duration, those that are five years old and those that are only a year old will have distinctly different values. You can design a custom report that rates each asset according to age so you can see which ones might be nearing the end of their useful lives.
2) Assets with High Work Order Costs
When you are aware of the assets that require much more labor to maintain than others, you can begin to pinpoint the root causes and take proactive steps to address them. For instance, you might learn that technicians have to repeatedly replace a defective component and take action to find a long-term solution.
3) Cost vs. Overall Production
Your assets will produce more goods the more uptime they have. It’s important to compare production to your total cost of ownership. This comparison helps you understand if the higher costs contribute to higher output for that asset.
4) Repair or Replace Decisions
If you want to make more accurate judgments about whether to repair or replace equipment, it helps to have a better understanding of the total cost of ownership for your assets. Additionally, it can assist you in developing a preventive maintenance (PM) plan that is both more efficient and cost-effective. While many assets benefit from preventive maintenance, you have to find the right balance to not waste money on unnecessary PMs. So, always consider the replacement cost, if it exceeds the cost of repairs, and whether the asset is capital or operational expense as you decide what to run to failure.
Start Tracking Total Cost of Ownership Today
The total cost of ownership is a figure that can assist you in identifying the assets that are most beneficial to your company and those that are ready for replacement. Discovering the best maintenance plan for each asset is made easier by calculating TCO for each one. A CMMS software solution is the easiest way to implement TCO and asset utilization reporting.