Reducing Total
Cost of Ownership

// REDUCING TOTAL COST OF OWNERSHIP

V-LINE understands how easy it is to underestimate the total cost of ownership, especially when a system is relying on unreliable data, a high number of vendors and factors such as poor tail spend management. What might seem like a good deal to begin with, becomes an expensive decision over a course of time. MRO costs are not limited purely to the purchase price of the item or service required. The Total Cost of Ownership (TCO) is much more than that and has to factor in sunk costs (research and development, testing and evaluation), overheads (sourcing costs, administration, storage and inventory management), cost of operations (installation, inspection, labor, spares, maintenance) and costs such as downtime and systems support.

The iceberg example is the best way to explain TCO. The original purchase price makes up only 15%-20% of the total cost of a product. TCO includes all the costs to acquire and maintain a product during the entire period of ownership. Up to 80% of the cost over its entire lifecycle are hidden from view. This means the lowest-price supplier is not necessarily the lowest-cost provider.

Direct and indirect costs incurred throughout a product’s lifecycle far outweigh any initial savings. A 5% saving on an initial purchase price is much more expensive than an annual 5% total cost reduction on that purchase over five years.