One of the hottest trends in engineering and manufacturing is making data-based decisions. Big data and the Internet of Things have revolutionized how companies do business. Marketing yourself as a candidate who is familiar with these principles and the impact they can have on a company’s bottom line can help set you ahead of other applicants. So the question is, how can you showcase that ability and skill? Understanding the concept of total cost of ownership is a great example of how to show employers your value.
Understanding Total Cost of Ownership (TCO)
TCO is essentially an analysis of the lifetime costs associated with a certain asset. It is also known as life cycle cost analysis. We are all aware that ownership of an asset, such as a certain product or even a process, comes at a price. Upfront costs are the most familiar to businesses and consumers, but there are also external costs that are important to be aware of in order to fully understand the long-term costs. These external costs can consist of the price to install, deploy, operate, upgrade, maintain, and even dispose of a particular asset. In the world of acquisitions, understanding the full TCO of an asset can reveal a more long-term and realistic cost, one that is often substantially more expensive than the initial purchase price.
Identifying Hidden Costs
TCO analysis is particularly helpful for businesses because it allows companies to make decisions based on not just the obvious price tag but the unexpected and hidden costs of owning a product for the length of its use. The analysis consists of identifying the resource and the lifecycle of that resource. Ownership life consists of a known start and end date of use of the resource. From there, TCO identifies various cost categories that can be expected over the life of the resource.
There are always obvious costs and hidden costs associated with ownership of an asset. Obvious costs include the purchase cost and maintenance costs of a resource. Hidden costs can include acquisition, upgrades or enhancements, deployment, operation, infrastructure support, insurance, environmental impact, security, financing, disposal, decommissioning, and depreciation costs.
The identification of these obvious and hidden costs depends on an analyst’s ability to plan for the possibility of cost impacts beyond the basic price tag. These cost categories can come from previous experiences, company policies, industry standards, vendor recommendations, other TCO analyses, project plans for implementation, and even the long-range business plan of the company impacted by the cost of ownership.
Structure of the Analysis
A TCO Analysis consists of a cost model covering the entire ownership life of an asset while supporting the purpose for the acquisition and needs of the owner. Analysts look closely at the kinds of resources used in each of the obvious and hidden cost categories, as well as the activities that result from ownership. This cost model provides a framework for an informative and valuable cost analysis which would otherwise be packed up within the purchase price or ignored completely. In this way TCO provides insight into the overall cost of a resource that businesses are able to plan around and make business decisions on.
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