Total cost of ownership (TCO) is the sum of all of the costs associated with every activity in your supply chain. By reducing TCO, companies that need custom cable assemblies, wire harnesses, and electro-mechanical assemblies can strengthen their bottom line. In addition to lower costs, businesses with optimized supply chains experience increased quality and better delivery. In a highly-competitive marketplace, reducing TCO can give you a competitive edge.
Supply chain TCO is important, but it’s also misunderstood. In a presentation to the Wire Harness Manufacturers’ Association (WHMA), the Purdue Manufacturing Extension Partnership (MEP) Center reported that “better total cost of ownership decisions” was the top-ranked area of concern for companies in a Voice of the Customer survey. Yet many of these same firms underestimate their true supply chain costs. In fact, surveys indicate that supply chain TCO can be 20% higher than the piece price.
Understanding Total Cost of Ownership (TCO)
If TCO is widely misunderstood, it’s probably because many manufacturers still take a traditional approach to costing. These models account only for purchase price – a direct cost. By contrast, TCO includes both direct and indirect costs across all of the following areas:
- Regulatory compliance
- Intellectual property
- Political and security risk management
- Trade
- Oversight
- Product quality
- Shipping and logistics
- Inventory
- Piece price
- Other inputs
To reduce TCO then, manufacturers need to take a systematic approach to supply chain optimization. There are tremendous opportunities in this area, yet many companies limit their continuous improvement efforts to operations. At a time when business competition is between supply chains instead of just companies, ignoring TCO can put you at a disadvantage.
Determining Total Cost of Ownership (TCO)
As a forward-thinking manufacturer of custom cable assemblies, wire harnesses, and electro-mechanical assemblies, SHINE understands the importance of total cost of ownership and can help you to make informed business decisions. In Part 2 of this series, we’ll take a look at what to think about when analyzing TCO components. In the meantime, please contact us for more information about our capabilities.
Note: Part 2 of this series is now available.
