When evaluating your overall organization or managing a project, it’s important to understand what the Total Cost of Ownership (TCO) is. TCO represents the total cost associated with a finite project or your ongoing operation; it’s the summation of all the inherent, indirect and direct costs of the area of focus. In general, we boil TCO down to three broad categories: Cost, Time, and Risk. All three can be far reaching and mean different things to different companies and their initiatives. To a novice it can be easy to conclude the goal is to minimize all three, but the reality is the real world is much more complex and interdependent. Pulling one lever always pushes another, which can create complex TCO impacts. Below are some key steps that, when followed, can help to successfully balance the cost, timing, and risk impacting the TCO in your organization or next project.
Total Cost of Ownership: 3 Steps to Successfully Balance Cost, Time, & Risk
1. Identify Your Ideal TCO Structure
The TCO structure is simple. Picture a triangle where each point represents cost, time, and risk. As the costs of each of these points increase, they move further away from the center; the TCO represents the area of the triangle. As mentioned above, your initial instinct might be to minimize the area of TCO until it doesn’t exist anymore or is extremely small. But what many individuals fail to recognize is that accepting certain costs provides direct benefits that will still make your initiative successful.
A simple example is raw material cost. It’s hard to run a manufacturing cell successfully when you don’t purchase materials; however, the more pressing issue is how much material you’ll need. This is, of course, depends on many variables, ranging from how readily available the materials are to how long their shelf lives are, and so on. Deciding how much of the materials you’ll need also impacts the level of inherent risk and associated cost, so it’s not a simple minimization of TCO, but rather a balance of the three categories.
Your first goal must be to visualize which TCO structure is best for your program, initiative, or overall enterprise and should be well aligned with your firm’s overall marketplace strategy. For instance, if your company wants the focus of its strategy to be speed to market and customer service, then it’ll need to have a significant amount of cost associated with time so that it can provide goods and react to customer service needs quickly, ideally before your competitor does. And by understanding that your firm’s TCO triangle should be skewed towards time, you can focus on balancing cost and risk appropriately so that your TCO area is minimized.
2. Understand Your Current TCO Structure
The only way to get your business to an ideal state is to understand where it’s at today, which is challenging because it requires you to take a hard, unapologetic look at your company’s current state of operations. Your number one goal here is to obtain solid data on your firm’s performance and use it to inform your current TCO structure. Use the data to answer questions like:
- How much average inventory are we holding?
- How many suppliers do we have per component or commodity?
- Do we have back-up suppliers?
- Are we paying too much for our raw materials?
This list could continue, but answering those questions specific to your firm’s operations will illuminate how you’re balancing cost, timing, and risk at your firm, and what your TCO structure looks like.
3. Develop a Transition Plan
Finally, once you’ve compared your current TCO structure to your ideal one, you need to develop steps forward to transition to, or launch, the new initiative that’s in line with the identified ideal TCO structure. The focus here should be to develop a plan that utilizes incremental steps rather than wholesale changes because a transition plan must always be finetuned along the way to ensure costs and risk are controlled.
Realizing the value an incremental transition brings is simple: with each step forward you get more information, and with more information, you’ll make better decisions. Making large, wholesale operational changes can be significant, but can seriously impact the risk component of your TCO balance. Major transitions can also create TCO structures that are completely different from where you started and light years away from your ideal vision. The optimal strategy requires small movements and thoughtful reflection on the outcomes. Developing an execution plan that flows in this fashion will ensure you reach your ideal TCO structure without adding additional cost or risk.
Balancing the Total Cost of Ownership in your organization is critical to operational efficiency and overall marketplace success. Companies who understand how they’re balanced today and how they need to be balanced to successfully serve their markets are poised to crush their competitors. By following the steps discussed above and viewing your firm’s operations and project execution through a lens of honesty, you’ll be well positioned to transition to your ideal TCO structure.