The price on a quote is only part of what something costs. Total cost of ownership (TCO) adds up everything you'll pay over the life of what you buy: the price, delivery, installation, training, running costs, maintenance, downtime, and what it costs to get rid of at the end.
Take two forklifts. A costs $20,000 and $3,000 a year to run. B costs $26,000 but only $1,500 a year. Over five years A costs 20,000 + 5 × 3,000 = $35,000, and B costs 26,000 + 5 × 1,500 = $33,500. The dearer one is cheaper to own.
Suppliers often offer price breaks: a lower unit price for a bigger order. If bolts are $4.00 each up to 499 and $3.60 from 500, then 480 bolts cost 480 × 4.00 = $1,920, but 500 cost 500 × 3.60 = $1,800. Buying 20 more saves $120, as long as you'll use them and have room to keep them.
For goods from another country, the landed cost (price plus freight, insurance, duty, customs fees and handling) is the true price. A quote that's 15% cheaper can vanish once a container crosses an ocean.
Poor quality has a cost too: parts inspected and sent back, production stopped, customers' warranty claims. A supplier with a slightly higher price and far fewer defects is often the cheaper choice. TCO is how procurement teams make that case with numbers instead of a feeling.
A machine costs $12,000 and $2,000 a year to run. What is its total cost over 4 years, in dollars?
| TCO | Price + delivery + running + upkeep + disposal. |
|---|---|
| Price break | A lower unit price from a set quantity. |
| Landed cost | Price + freight + insurance + duty + handling. |
| Cost of quality | Inspection, returns, stoppages and claims. |