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The Total Cost of Ownership Approach



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Faced with several alternatives, making any rational purchase decision simply means making the best possible selection at the time it has to be made.

Often what makes capital equipment purchase decisions so challenging is not just the complexity of the particular issues involved or the underlying mechanics of decision making, but all the residual uncertainties of fact and assumption that linger even after months of careful investigation, evaluation and consideration.

“Did we include all the factors that should go into this decision?”… “Did we account for them fairly?”… “Did we accurately estimate projected costs and savings?”… “Should we do more before we decide?”… these and other questions reflect the nagging doubts that confront any equipment buyer.

While uncertainties will always exist, working within a logical and comprehensive decision framework will help assure the firmest possible footing in the purchase process. Such a framework is provided by the Total Cost of Ownership approach.

The Total Cost of Ownership (TCO) approach involves identifying, estimating and comparing life cycle cost streams associated with purchase alternatives, and then favoring the single candidate offering the lowest total ownership cost.

Though simple enough in concept, TCO poses its own challenges in practice:

  • “How are we to identify all the ways a feeding system impacts our costs, now and in the future?”
  • “How can we know what our future costs will really be and when they occur?”
  • “How do we translate all the suppliers’ various equipment features, benefits and selling points into the currency of life cycle costs?”
  • “And what about all the intangible factors involved in the decision?”

The TCO approach, like any decision framework, is not perfect nor is it by any means comprehensive. You can’t anticipate all the ways a feeding system might impact costs. You can’t know in advance what costs will be in the future or when they arise. It would be a waste of time trying to attach individual value to dozens of differing design features, and sales arguments. And all the intangibles in the equation defy direct conversion to cost. That’s why they’re called intangible.

Nonetheless,TCO remains an appealing idea. Processors, purchasers and people in general accept the notion that if all life cycle costs could be somehow accounted for the candidate offering lowest TCO would be the logical choice.

Thus, the question becomes how to make TCO a practical and achievable approach... one that fairly accounts for all the important considerations in the buying decision, allows for the inevitable uncertainties, and yet doesn’t require a PhD to complete. The following sections attempt to do just that.
 

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