Hi Friends hope you all are doing well and taking your ownerships of your decision in calculated way.  Purchasing is one of the oldest profession of this world , it witness many changes ,started from exchange of goods till complex banking transactions of today’s world , simultaneously evolution of technology add many new age concepts in purchasing , total cost of ownership (TCO) is one of them.

TCO is an approach to consider all direct and indirect cost associated with the material which occurs during its complete life cycle.  TCO actually helps buyers to look beyond the “price “factor. Buyer need to understand a complete insight of material use and its technicality to take proper decision of buying.

Since starting of modern day purchasing everybody knows about the concept of landed cost but due to evolution of new technologies, introduction of some new environmental laws etc., TCO is now more imperative. 

To understand this concept better I would like to give below examples –

An IT firm intend to purchase a new IT technology based system for their new call center, their buyers floated enquiry for this and they receive many responses, after checking technical suitability they found three vendors as their probable source , the vendor who was offering lowest price and his price is nearly 20% less than second lowest vendor but he is offering the technology which license has to renew every year but he is locally situated and can provide full maintenance support , the other two vendors offering the same technology but license period of software is more but their service support methodology is different as they are not locally situated and for every visit they need To & Fro and lodging & boarding charges  ,  in this type of cases buyer has to analyze each and every option very carefully , first of all buyer must know the expected life cycle of that system, and should get the knowledge about probable and unexpected faults which could occur in the system during the life cycle ,  addition to this buyer must calculate the approximate cost of down time per hour or per day  of the system. After getting necessary information now buyer can calculate the total cost of ownership for each vendor, for lowest vendor buyer have to calculate price for every year license renewal + expected cost of downtime as vendor is locally situated hence downtime shall be less and there would be no cost of lodging & boarding, likewise for other vendors buyer have to calculate cost of expected downtime + To & fro and lodging boarding charges and approximate number of visit in a life cycle period.

In this case initially it could be infer that in long run second lowest buyer would prove cheaper, but before taking any decision it should be understood that it all depends upon cost of downtime for IT firm, cost element in lowest vendor case could be calculated more accurately but in the case of second lowest vendor no one can exactly envisage the cost in long run as exact cost is depend upon number of visits and the same could be any number. Hence buyer should take decision of TCO in this case as per his firm “cost of downtime”.

TCO analysis is very important for buyer, the decision initially looks viable could found costlier after thorough analysis, now a days buying procedure become more complex, analysis of vendor procedure is not enough payment term has also to be taken care, lot of banking charges are introduce, private bank and public sector have different fees for their service, buyer must calculate all the charges thoroughly before proceed. Many environmental laws also make it necessary to check the cost of ownership subtly, if the material has to be dispose after its life cycle as per any government set of rule then buyer should analyze this cost factor also before taking any decision. 

TCO plays a vital role in purchasing, it is very necessary for buyers to keep updated themselves in this ever-changing world so they can take their each & every decision correct.

Good Bye & Take care.