What Is Total Cost of Ownership in Manufacturing (And How Does it Impact Your Company’s Bottom Line?)

When you buy an item, its initial price does not reflect the total value you’re investing in that purchase. If you want an accurate assessment of what you’re spending, you want to calculate the total cost of ownership (TCO). This metric combines several factors of owning and operating a piece of machinery for a full picture of the cost of ownership over the lifetime of its use. 

Total cost of ownership in manufacturing is particularly useful. It allows you to compare machinery that may operate in a facility over years and even decades. If you want to make more informed and wiser investment decisions for your manufacturing facility equipment, you should be using TCO as a factor in your budgeting and forecasts.

In this article, we’ll examine why that is the case and what you can do to calculate your own total cost of ownership in your manufacturing facilities.

What Is the Total Cost of Ownership?

Let’s begin with a brief overview of the term “total cost of ownership.” This starts with a comparison of TCO to the initial purchase price of a product. It’s important to remember that the purchase price does not indicate whether something is a good investment. 

On the one hand, low purchase prices may come with short life spans or high maintenance costs, thus diluting the up-front cost savings. On the other hand, higher-priced items may last longer or need less servicing, leading to long-term savings. 

Total cost of ownership takes all of this into account. It provides a complete picture of the quality of each investment over time by using data on all aspects of buying and using a product. This gives a realistic estimate of how much a company will spend throughout the duration of an item’s life. 

TCO also includes the hidden costs of using equipment. For instance, this could encompass expenses related to daily operation, maintenance, and training staff to use a piece of machinery. These hidden values are not just a factor. They can be a sizable percentage of the overall TCO.

Why Is Total Cost of Ownership Important?

Understanding total cost of ownership may is one thing. But how can it help your manufacturing operation? The answer is profitability. 

Total cost of ownership provides a means to determine the real return on investment (ROI) of buying a product. Comparing the ROI on various products ensures that you make a value-based decision before committing to a multi-year investment.

Total Cost of Ownership vs. Price

Price only gives one part of the total picture when purchasing equipment. It indicates the initial investment but fails to account for the cost of owning and operating the product. And yet, when it comes to something with the longevity of manufacturing equipment, the latter is a critical part of understanding the true value and cost involved.

Comparing prices alone does not account for goods that could have higher operating costs, demand more training, require frequent maintenance, or have shorter service lives. Even if these products cost less initially, they will produce a higher financial burden over time.

Total cost of ownership identifies all possible costs, hidden and obvious. It calculates how much the product will cost in totality. Another term used for TCO is the asset life-cycle cost, which refers to the calculation accounting for all expenses associated with the product during its useful life. 

It’s worth emphasizing that total cost of ownership is highly dependent on quality data. Better data will lead to more informed decisions that provide long-term benefits for the facility while keeping operating costs down.

An Example of Total Cost of Ownership

Consider two equally priced strapping machines for the packaging line of a manufacturing company. (We’ll call them “product A” and “product B.”) Sales and discounts can make some products cheaper than others for the initial purchase. In some cases, lower-quality parts reduce the purchase price. 

How can you tell the difference? By calculating the total cost of ownership. Knowing the TCO is useful to gauge the differences in the value of each product not just initially but over time.

After analyzing the total cost of ownership for both units, you might find that product A has a much lower TCO due to minimal maintenance costs, longer service life, and better customer service availability. In comparison, product B’s TCO is higher despite having the same purchase price. It costs more to operate over time due to more frequent repairs and maintenance and can be expected to wear out more quickly.

Only by using the TCO can you get the impression of the return on investment your facility will reap from buying a product.

Who Should Use TCO Analysis?

Total cost of ownership analysis gained popularity as a way to assess value during the 1980s when companies began to invest heavily in IT hardware and software. At the time, participants in the highly competitive IT marketplace needed means of differentiating their products from others. One company would claim that its competitors made software and hardware with high operating costs. However, when calculated, the TCO for nearly all IT solutions at the time was several times higher than the purchase price.

Over time, the concept spread to other industries. Today, many areas of business have embraced total cost of ownership when integrating technological solutions into their operations. Here are a few examples.

Total Cost of Ownership in IT

Total cost of ownership started in IT, and its benefits continue to be relevant in the tech industry to this day. The average tech stack for larger enterprises is over 650 applications. This represents a massive expense that deserves TCO consideration.

Companies must consider the prices of acquiring and activating software as well as how much updates will cost over time. Ongoing subscriptions are increasingly popular. Plus, businesses must determine the time needed for training employees in using software, updating IT staff on troubleshooting said software, and gauging whether their facilities need hardware updates to accommodate evolving needs.

Total Cost of Ownership in Real Estate

Total cost of ownership often comes up in making improvements to real estate. For example, a building may need to determine whether to add solar panels to a roof. The cost will be higher than standard roofing material. However, the solar panels will generate electricity, which lowers power bills. 

The exact value of the investment will depend on how much power the panels can create versus how much the building needs. There are also considerations such as leasing programs and government rebates. Similar green upgrades, such as energy-efficient or water-efficient appliances, also require TCO analysis to determine how much these investments will benefit a building over time.

Total Cost of Ownership in Transportation

Companies choosing to invest in fleet vehicles or other transportation often use total cost of ownership to determine the best model to use or brand to buy from. For instance, a company may need to decide between using electric or gas-powered vehicles for their fleet. 

The former may cost more initially, but they don’t incur fueling costs that vary with the price of gasoline. In addition, the electric models produce less pollution. Choosing more eco-friendly fleet vehicles may improve the company’s reputation and lower the fleet’s operating costs, which could improve profits. Similar assessments will likely be needed for self-driving fleets in the near future, too. Texas, for instance, is heavily invested in integrating autonomous trucking into mainstream thoroughfares.

Total Cost of Ownership in Manufacturing

Automation is increasingly popular for upgrading productivity in manufacturing facilities. The arrival of Industry 4.0 has changed the landscape, introducing everything from detailed inventory analysis to streamlined end-of-line packaging systems.

However, not all automation solutions yield the same ROI. For example, when choosing automated options, such as strapping machines, the facility needs to determine how much they can save by upgrading to machinery to do the job instead of having people strapping packages or using older, less efficient technology. That’s where TCO’s comprehensive analytical approach can be a game-changer. 

What Are the Benefits of Total Cost of Ownership in Manufacturing?

The benefits of total cost of ownership in business include the ability to:

• Compare sustainability
• Evaluate Risks
• Assess ongoing expenses
• Gauge the ongoing performance of various products or services

These parameters make it possible to choose the best investment for the long term. If you want to go beyond price and evaluate the TCO of two contenders in a purchasing decision, though, you have to know what to look for. Below are four benefits that should factor into every total cost of ownership calculation.

1. Ongoing Costs

This one is easy and intuitive. Ongoing expenses can be expensive and can quickly surpass the purchase price, especially when you’re talking about durable products like machinery that last for years. When you’re determining TCO, be sure to account for costs such as supplies needed to operate the equipment, training new and existing employees in its use, and general maintenance.

2. Outside Variables

Total cost of ownership examines purchase price as well as all the other variables involved in owning and operating a product. This includes employee training, transportation, materials, installation, delivery times, and operational costs. Industry-specific variables are also part of the TCO analysis. For instance, the cost of permits for installing solar panels on a building would be factored into the final TCO for a solar project.

3. Performance

The performance of a product will impact its total cost of ownership. Repairs, maintenance costs, longevity, and operational downtime all contribute to the total investment. The less reliable a product is, the more costly it will be due to its poor performance. Quality products that perform efficiently reduce the total cost of ownership, thus justifying a higher up-front purchase price.

4. Sustainability  

The impact of using a product extends beyond a company. Sustainability is important in finding out the effect using a product has on the environment and supply chain. For example, electric vehicles promote sustainability because they don’t rely on fossil fuels, which represent a finite resource. In manufacturing, sustainable products will have materials sourced responsibly or those that can be recycled. Strapping machines that use 100% recyclable polyester (PET) strapping materials are one instance of a sustainable option for automated solutions at a manufacturing facility.

The Costs in TCO

Some factors have a greater influence on total cost of ownership than others. For instance, ongoing maintenance costs have a significant impact on TCO for manufacturing machinery. A machine should operate as long as possible and require little maintenance that could initiate lengthy downtimes or bring a halt to operations. The amount that each of these expenses influences your TCO depends on your industry. Here are four areas to consider when weighting their importance on your overall total cost of ownership.

1. Acquisition

Purchasing items — especially manufacturing equipment — can have similarly high, unforeseen acquisition costs that include more than the purchase price. This includes delivery, installation, and setup fees to get the product in place and running. Connecting to system-wide management and control software is also often a factor, as is the cost of the software itself and the need to upgrade everything to work with the new product. 

Other factors can reduce these acquisition costs. For instance, supervised installation from the manufacturer of a strapping machine reduces the chance of issues that could increase setup costs. Plus, this type of support reduces the time needed to get the machinery integrated into the packaging line and contributing to productivity.

2. Operation

Operating costs for manufacturing equipment include the productivity of the machinery. Highly productive machines may have premium costs but will save time and money in the production process.

At the same time, not all equipment needs to have the highest productivity levels. For example, smaller facilities that only need strapping equipment during high-demand seasons may benefit from operator-cycled machines instead of fully automated models. Manufacturers that need higher volumes have more to gain from fully automated strapping machines that run at peak efficiency.

3. Personnel

Personnel costs are a major factor that is too often left out of acquisition calculations. This includes training employees on the new equipment. 

But it also should consider ongoing training expenses due to employee turnover as well as updated information to keep workers aware of and capable of handling any changes. If a machine needs additional staff to operate it, maintain it, or train others to use it, the cost of hiring those workers also goes into the personnel category.

4. Ongoing Maintenance

Maintenance costs are a major component of total cost of ownership for manufacturing equipment. This can vary depending on the unit in question. For strapping machines, the equipment needs a long life expectancy. 

Ideally, upkeep should require few replacement parts and maintenance needs. For instance, strapping machines from EAM-Mosca use wear-free direct drive brushless motors to reduce replacement part needs. These attributes decrease downtime, which can be a significant contributor to total maintenance costs. In addition, our services include technical support and continued machine performance support with predictive and preventive maintenance options.

Steps of a TCO Analysis

Conducting a total cost of ownership analysis requires gathering as much information about a product as possible. This data should include life span, obvious and hidden costs, and any extra income the product generates. 

Once you have these figures, you can compare the results to find the best product or program for your facility. Here is a step-by-step process to do that.

1. Determine Length of Ownership Life

The first step in calculating total cost of ownership is determining the product’s average length of life. This allows you to divide the costs you identify over that lifespan to find out how much the product will cost annually.

Another way to use ownership life for TCO is to use a set period of time, such as 10 years, to better compare the costs of operation and maintenance. A predetermined life span creates a consistent metric that makes it easier to directly compare products that have different life expectancies.

2. Categorize Obvious and Hidden Costs

Identify the obvious costs, such as maintenance and purchase price. Then consider hidden costs such as: 

• Part replacement
• Disposal
• Installation
• Personnel training
• Insurance
• Reconfiguration
• Financing costs

Categorize both hidden and obvious costs into how much they impact the total cost of ownership. For instance, maintenance costs will often impact manufacturing equipment TCO more than the purchase price. Additional support for your equipment, like that provided by EAM-Mosca, helps lower TCO by reducing your need to find third-party installation, training, or setup services. Plus, with our company-provided service for our products, you have the ability to ask questions before problems occur. This reduces potential maintenance or repair issues that could lead to downtime.

3. Account for Additional Income

When calculating the total cost of ownership for new or upgraded manufacturing equipment, you need to look beyond the costs that the acquisition incurs over time. Also, calculate how much the new machinery will increase productivity and profits. Incorporate the extra income into the TCO to reduce the overall cost and show the return on investment you can expect from the machine.

Another source of additional income to lower the TCO is the value remaining in the product after the first five years. Machinery that keeps its value can resell for higher prices if your facility needs to upgrade. Keep in mind that higher value retention is also indicative of well-made products designed for long-term use.

4. Choose a Product

Once your total cost of ownership analysis is complete, you should be able to identify the best product for your operations. Since the purchase price is usually such a small percentage of the TCO, don’t be surprised if the cheapest machine is not the one with the lowest owning and operating costs. TCO analysis sheds a more holistic light on which product will provide the greatest monetary and productivity benefits for your manufacturing facility. 

For example, a strapping machine made with innovative, sustainable components and efficient systems may be priced higher. But this is indicative of the fact that it is built to last longer, requires fewer replacement parts, needs less maintenance, and provides a better ROI than other options. 

These benefits may not be obvious at first, but they become clearer throughout the machine’s service life — and when that happens, you’ll find that your organization is set up to thrive not just today but for years to come.

Contact EAM-Mosca Corporation for More Information on Our Packaging Line Machines

EAM-Mosca Corporation produces strapping and stretch wrapping machines for the packaging phase of manufacturing. Our equipment uses the latest innovations to ensure a high-quality design and exceptionally long service life. 

We also take the total cost of ownership of our equipment seriously. Along with providing the highest quality end-of-line packaging solutions, we improve TCO by offering lifetime support and services. Our machines are optimized for efficiency and use sustainably sourced components to deliver better packaging processes that elevate your business’s operations, your productivity, and ultimately your bottom line. 

Contact us today to find out about our products and how our commitment to ongoing service makes our packaging equipment a contender in any TCO comparison.