Total Cost of Ownership (TCO)

Total Cost of Ownership, often referred to by its acronym TCO, is a vitally important element of doing procurement right.I constantly find examples of companies that apparently failed to consider TCO when making design or sourcing decisions. Here is one my recent favorites:

A desk chair that I purchased 15 months ago instantly became unsafe and unusable when the two bolts holding the back of the chair to the seat fractured in place. The fractured bolts could not be removed from the chair’s seat; as a result, the manufacturer was in the unenviable position of providing affected customers with a new, replacement seat, as well as the needed bolts. The manufacturer stood by its warranty, and did just that - shipping the replacement parts at considerable expense from China.

All because the original two bolts were either mis-specified (poor design and specs), or mis-procured (price focus).

This was a very popular desk chair, featured by one of the major office supply chains. The volume of chairs sold was probably high, making the total “bottom line” impact of the replacement program significant for the manufacturer, I am certain.

But that only describes the manufacturer’s potential TCO. The office supply chain is devoting time and effort to the replacement program (its own TCO), and the customers are spending time as well (my TCO). If, in the final analysis, a customer’s future loyalty and future business is lost, then the manufacturer’s TCO, and the retailer’s TCO, could be much higher.