To optimise costs, procurement departments often rely on TCO. This method of calculating the total cost of ownership of a product or service allows companies to buy exactly what they need while optimising expenditure. To highlight the importance of TCO, we have an incredible but true story to share. A few years ago, the Irish Parliament spent over one million euro[1] on a high-performance printer, only to realise afterwards that the machine was too large to fit into the room intended for it. This affair, quite rightly, made headlines across European media.
Definition of TCO, Total Cost of Ownership
TCO (Total Cost of Ownership) is an approach widely favoured by procurement departments. It aims to calculate the real cost of a product or service. This includes direct costs, as well as indirect costs over the entire lifetime of the product or service in question.
So, how do you calculate TCO? To calculate the TCO of a product or service, you need to take into account all types of costs, direct and indirect, namely:
- Purchase price;
- Induced cost (transport, packaging, insurance, installation…);
- Acquisition cost (operation of the procurement department);
- Cost of ownership (depreciation costs, stock management…);
- Maintenance cost (spare parts, upkeep costs…);
- Usage cost (operations, associated services…);
- Cost of non-quality (meeting deadlines, handling non-conformity…);
- Withdrawal cost (reuse, recycling, destruction…).
Depending on the type of products or services involved, the method for calculating the TCO should be adapted. Whatever the calculation, this approach remains a fantastic tool for evaluating all costs and making informed decisions based on this clear information.
The story of a printer with a record TCO
A few years ago, the Irish Parliament decided to purchase a state-of-the-art printer from Komori. It was a significant investment given its considerable purchase price of over 800,000 euros[2]. Added to this initial cost were associated equipment (guillotine, folding machines, etc.) bringing the final transaction to over one million euro. However, once the printer was delivered, the teams realised its dimensions, in both literal and figurative senses: 2.1 metres high by 1.9 metres wide. They realised that the printer didn’t fit in the room intended for it. In fact, it couldn’t even pass through some doors of Leinster House, a building dating from the 18th century.
Returning the product was impossible as the contract had already been signed. The printer then had to be stored in a warehouse for about ten months while the necessary work was carried out on the building. Initially, the printer was stored free of charge by the supplier, then storage fees were charged at 2,000 euros[3] per month. During this time, structural work could take place: Temporary removal of door frames, wall demolition, ceiling raising, embedding of a metal frame, etc. In total, the work cost nearly 230,000 euros[4].
And the story didn’t end there! Once the printer was properly installed within the walls of the Irish Parliament, a new thorny question arose: Would the teams need specific training to use this cutting-edge machine? As Sinn Féin TD David Cullinane explains: "There are no human resource issues related to operating this printer, there are training issues. It’s a printer that’s twice the size of any other printer the staff have used before. In fact, they have to use a forklift in a very confined space to load the paper." This is another point that should have been anticipated and budgeted for.
At the same time, the media brought this affair to light, causing general outrage. These are all expenditures that could have been avoided, especially as it involves public money. Besides the media scandal, rumour has it that staff then refused to use the machine until they received a pay rise…
TCO: Three essentials to never neglect
In the end, a simple error caused the total cost of ownership (TCO) of the machine to skyrocket. This misadventure deserves an analysis to draw lessons that could benefit many procurement departments. It reminds us of three essential elements for any purchase or project of this scale: The importance of calculating TCO, carefully examining technical specifications, and, of course, using the right supplier.
Adopting a TCO approach
For purchases of this magnitude, it’s essential to calculate the total cost of ownership (TCO). This involves considering ancillary costs, in addition to the initial purchase price, such as operating costs, training costs, storage costs, non-quality costs…
-
The upfront cost of the machine;
-
Its delivery (transport and customs costs);
-
Costs related to consumables (toner cartridges, printing paper and spare parts);
-
Expenditures related to energy consumption (electricity);
-
Long-term maintenance costs (software updates, repairs and replacement of wear parts);
-
All unforeseen expenditures (temporary storage, renovation work to accommodate the machine, employee training).
It’s by adding up all these expenditures that we obtain the TCO of the printer.
Detailing product specifications
It’s also important to qualify the need, whether in terms of functionality, quality or results. In this process, procurement teams would do well to consult users, as well as necessary experts, to co-construct technical specifications.
Choosing the right supplier partner
Lastly, choosing your supplier is not trivial. It’s important to thoroughly analyse the supplier market, ensuring the support capacity of these actors. Discussions should lead to the selection of a supplier who is an expert in their field and, of course, who advises the company from start to finish in choosing its products.
As you’ve understood, this anecdote underlines the importance of conducting proper sourcing. This includes analysing needs and costs as a whole, but also collaborating with all stakeholders. This is a story that is surely not an isolated case and from which everyone can draw valuable lessons, for the benefit of better financial management.