In my previous article, we have discussed how TOC (Theory of Constraints) can influence to reduce the inventory and now we can discuss on how TCO (Total Cost of Ownership) principles can influence the buying decision to bring operational excellence.
Usually or subconsciously we all apply these principles when buying an asset for our personal use. Basically the drive for owning it will come from the need and utility of the asset.
Similarly when you are in a role of capital / asset procurement it is much evident that you apply these principles to make a wise buying decision. In few cases if proper evaluation is made the TCO can guide us on buying or hire decision too.
The logical way of evaluating the total cost of ownership is very simple. It is cost of the asset plus operational cost (fixed and variable) till the life of the asset*. The fixed operational cost include annual maintenance cost, services for preventive maintenance, handling cost and other administrative cost like insurance, depreciation, rent, rates etc., The variable cost is more from a operating perspective which varies from the usage of the asset like consumables and operator cost.
Initially the variable cost can be based on the budget and projection on usage of the asset. By adding the fixed and variable cost, you can arrive at a base figure on cost of ownership. This figure is taken as base figure only to compare the price before buying with respect to the other options available. However, the actual cost of owner ship is arrived only when you start tracking these costs after owning it. The real challenge is on tracking these costs.
Once you track the cost on day to day basis, the benefits you subscribe is:a) Track the budgeted TCO v/s actual TCO
b) Control the cost of abnormal spends on the asset
c) Usage of TCO for future buying decision
d) Decision on depreciate or discard the equipment to avoid further incurring the cost
e) At the end, arrive at a salvage value.
As mentioned it is not an easy task to keep a tab on all the expenses of all the assets you own especially when your operations and accounting is manual. In the world of technology such complex requirements are made simple. Any ERP would support these features, provided you have integrated the functions well in setting up the system.
The TCO process that cut across the functional modules is: procurement module, accounting, costing, Asset management modules along with plant maintenance modules.
*Life of the asset to be calculated based of the nature of asset as per the general accounting procedure.
The steps for integrating to get the best TCO results: At the time of procurement consider all negotiated cost be as part of the order. This is to ensure that complete procurement cost is built to asset while taking the receipt of the asset.
Capitalize the asset and create the asset as cost center. Next link the asset to plant maintenance so that preventive maintenance is planned and scheduled as per the calendar.
During or post maintenance ensure that the required spares and consumables are booked against the preventive maintenance order to hit the right asset cost center. Follow the same accounting process for all breakdown maintenance where spares and consumable are used during repairs.
Ensure the deprecation cost and any salvage value is also accounted to the asset cost center so that at the end you get actual TCO.
