What Is TCO and How Important Is It For The Company?
The total cost of goods and services is one of the points that receives the most attention in a company’s financial control . Therefore, it is essential to identify which are the direct, indirect and hidden expenses so as not to leave any expense out. And one of the ways to achieve this complete analysis is to learn what TCO is and how to calculate it.
This is because this metric involves all these costs, calculating an estimate of the expenses with a product or service during a given period .
This indicator can be measured in companies of different sizes and segments, such as transport companies and companies that need to manage fleets. Ideally, costs should be reduced without losing delivery quality.
To achieve this cost reduction, it is necessary to pay attention to some indexes. Today, in this article, we have brought information about one of the main cost metrics for goods and services: TCO ( Total Cost of Ownership ) .
Continue reading and learn:
- What is TCO?
- How does TCO work?
- How important is TCO?
- How to calculate TCO?
What is TCO?
TCO, which stands for Total Cost of Ownership , is a metric used to calculate the total cost of purchasing a product or service , such as a car or truck. It analyzes all expenses involved in the acquisition: direct, indirect and non-apparent costs.
If you need to purchase a heavy-duty truck for your fleet, it is wrong to only consider its purchase price. The total costs of this acquisition also include preventive and corrective maintenance, useful life, IPVA, insurance, fuel, taxes, among others.
Therefore, if the vehicle cost R$200,000, its total cost could reach R$205,000 per year.
In another example, TCO can involve all of a company’s assets, products, equipment, and tools. It can be applied to calculate the total cost of purchasing management software or large machinery.
How does TCO work?
Total Cost of Ownership works through a calculation that includes all expenses involved in purchasing a good or service during its useful life . The criteria used vary depending on the item being analyzed to control expenses effectively and in line with the reality of each company.
In general, this metric contributes to a broader view of the manager and the person responsible for the purchasing sector. After all, it is necessary to calculate which investment offers the best cost-benefit.
Sometimes, one vehicle may be more expensive than another, but during day-to-day work, it requires less maintenance or is cheaper to maintain.
In other words: it is necessary to calculate the total costs to make good investments, reducing expenses .
How important is TCO?
TCO is essential to support the decision-making of managers and business leaders, especially those who adopt the strategic sourcing methodology . This method seeks to reduce costs through technical assessments and supply purchasing strategies for companies.
Which, in turn, opens up space for other suppliers to compete for the position, promoting better analysis of costs, risks and opportunities to choose the most efficient alternative.
Additionally, Total Cost of Ownership offers other benefits such as:
- more complete comparison of expenses;
- better strategic and financial planning ;
- project optimization;
- reduction of operating costs in the short, medium and long term;
- identification of the real investment, which allows for more assertive expense forecasts;
- more accurate decision-making, driven by data;
- increased efficiency;
- better corporate financial health over the years.
This metric can be used, for example, to understand whether the best option for your company is to invest in its own fleet or outsource it. With TCO, the calculation involves several important criteria to identify the best cost-benefit.
How to calculate TCO?
To calculate the TCO, it is necessary to take into account some criteria that vary according to the good or service analyzed. In general, we can define them as: acquisition costs, visible (preventive maintenance, taxes and fuel ), hidden (depreciation, corrective maintenance, etc.), maintenance (licenses and updates) and implementation.
Understand better what each cost calculated in the TCO involves in the case of fleet management, for example.
- Visible costs : Expenses that are predictable, such as purchase price, preventive maintenance , taxes, fees and fuel.
- Hidden costs : these are unpredictable, such as corrective maintenance, vehicle depreciation, time with the vehicle stopped in case of repairs, accidents, etc.
- Acquisition costs : everything involved in the acquisition, such as time spent on market research, suppliers, software, etc.
- Maintenance costs : monthly fees, licenses, document updates, tools, management systems, etc.
- Implementation costs : if consultants are hired, vehicles are distributed to other branches, driver training is required, among others.
- Additionally, it is possible to separate direct and indirect costs:
- direct costs : purchase of systems and software, support, management, communication and development;
- indirect costs : low productivity , errors and bottlenecks in processes, unforeseen events, etc.
You’ve noticed that it’s difficult to apply a single TCO formula to understand the total cost of a supply, product or service, right? Therefore, it’s vital to understand all the expenses related to a given item to analyze every detail of the investment.
How to use TCO in the company?
To use TCO in a company, it is necessary to define a goal to calculate the total cost. If the idea is to find out whether it is better to buy or outsource the fleet, focus on this purpose to find the results and compare them. Another relevant factor is time: costs must be limited to the same period.
Don’t forget that each product has an estimated useful life, which can be divided into:
- depreciable life : product with a lifespan of up to approximately 5 years, showing depreciation over time;
- economic life : time that the purchase generates financial return. If this time is at the end, the value of the costs exceeds the return on investment.