Total Cost of Ownership: The Ultimate Guide

The ultimate guide to Total Cost of Ownership

December 30, 2024
By Chris Tomlinson, Lean Solutions Manager

How can over 50,000 labor hours be wasted a year on walking?

Like this: A worker strolls across the facility for some gloves or a tool. No big deal at first glance ... until you widen the lens to picture 300 workers doing this several times a day every day. That's how 50,000 hours (or around $1,000,000 in production cost) can be spent per year walking instead of creating value and growing the business.

This is the kind of hidden issue experts like me are trained to find and fix.

Defining TCO

There are a lot of supply chain initialisms out there: POU, BOM, ERP, etc. However, as a Lean solutions expert, the one I know best is TCO, short for total cost of ownership. TCO encompasses all costs associated with the acquisition, operation, and distribution of materials to the end user. This 360-degree view helps organizations understand the true cost of their supply chain beyond the initial purchase price.

Think of it this way. You purchase a new car. Is the price tag the only cost you pay? Nope. You've got registration, fuel cost, maintenance, insurance, and more. Most businesses only see the initial price, but TCO reveals all those other costs either hidden or ignored.

Now, the big question

How does knowing your total cost of ownership help? Well, for starters, it uncovers ways to lower costs, boost efficiency, and increase your organizational agility. (More on that last one in a minute.)

How exactly does understanding TCO lead to future improvements? With a Total Cost of
Ownership Analysis (or TCOA). This exercise involves quantifying costs surrounding your supply processes, using that data to set a benchmark, then presenting a set of solutions to achieve a more cost-effective state.

You’ve heard the phrase “If it ain’t broke, don’t fix it.” But that doesn’t mean it can’t be improved. That’s what a TCOA does. It transforms “business as usual” into “best in class.” How? Using various methods.

Let's break it down

First, it helps to bring in objective experts with experience in Lean methodologies. Our consultants see your facility with fresh eyes and an unbiased perspective. Chances are we’ve performed TCOAs at sites that fit your profile in terms of size, employee count, industry, and processes. But every facility is unique, so we use flexible tools like process mapping, Pareto analysis, and inventory analysis to delve deep into your operation. These tools help calculate your total cost of ownership and set a baseline for solutions.

Common pain points

When performing TCOAs, we routinely encounter invoicing and documentation errors, overstocked inventory, excess movement, and other process-related waste. A TCOA not only identifies these problems but also explains why they happen and offers solutions.

The solutions often include administrative process changes (a common refrain: stop using pen and paper, start using technology) as well as point-of-use improvements (reducing walk time to improve time on tool). A typical TCOA also presents ways to reduce freight cost, inventory cost, and labor hours associated with sourcing and material handling.

Adding up the impact

Here's an example of how procedural waste can fly under the radar. We helped a company find out they were wasting $60,000 a year on paper for receiving documents they didn't even use - each doc was just tossed in the trash after printing.

That's $60,000 of waste that went unquestioned prior to the TCOA.

Improvements like this can add up to significant cost savings. In fact, we recently completed a study of 445 well-vetted TCOAs and found that those facilities had an opportunity to reduce total cost of ownership by over 20% on average by adopting the recommended services and solutions.

The true value

You need to know where you are in order to get to where you want to be. That’s what a TCOA is for. It identifies non-value-added steps and provides solutions to eliminate them.

But total cost of ownership isn't just about cost; it's also about value. And not all value in a supply chain has a dollar sign directly attached to it. Things like safety, sustainability, productivity, and worker morale all add different kinds of value to your stakeholders, and all can be impacted by a TCOA.

Gaining agility

A common problem that plagues supply chains is a lack of agility. When the market changes or the supply chain is interrupted, set-in-stone processes mean you can't move fast enough. It's like
trying to turn a cruise ship instead of a speedboat.

One of the biggest takeaways from a TCOA is a set of technology solutions to monitor, track, and control how products are used within the facility. It includes reporting and analytics tools to understand consumption dynamics and proactively plan the supply chain – a speedboat approach to navigate fast-shifting currents.

The crux of it all

If nothing else, conducting a TCOA lets you know the health of your supply chain. It provides data that shows where you stand and gives you a direction for improvement. Not surprisingly, most companies opt for a solution with the highest return on investment, the lowest risk, and the fastest implementation.

Investing a little time today can lead to a more agile, cost-effective, and resilient supply chain for tomorrow. Fastenal has the resources and experience to find the best fit solutions for your supply chain needs. Time's a wasting! Let’s work to improve your total cost of ownership together.