total cost of ownership

The 5 Key Elements Adding Up to the Total Cost of Ownership in Logistics and Supply Chains

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Total cost of ownership (TCO) is an aspect which any logistics and supply chain manager has to think about, both in connection to inventories and stocks of products. This is one of the elements which determine the overall profitability of any company, because total cost of ownership chips away from the net profits and the actual margins applied to selling prices.

Total Cost of Ownership: the Silent Erosion of Logistics and Supply Chain Budgets

You may not think much of the fact that the transportation company had to spend extra time reading your packaging labels manually, because they are not properly placed for the automated scanners. Also, the time spent by your employees preparing orders is not always counted as downtime.

However, these are two aspects adding up to your total cost of ownership. What exactly does this term mean for logistics and supply chain? Every event, period of time and occurrence which prevents you from running your operations efficiently, and causes your company to spend money, adds up to the total cost of ownership. The higher the total cost of ownership, the longer the time until you will achieve the total return on investment.

Today we will discuss the most important elements which augment your total cost of ownership in logistics and supply chain and which need to be addressed as soon as possible if you want to increase your productivity and bottom line:

1. Warehouse Operations

Every operation which could be performed by an automated machine, but it is performed by your employees instead adds up to your company’s TCO. There are several aspects at work here: the employees’ salary is an ongoing cost, versus the purchase price of a machine which is a one-time expense. Machines, even the simplest ones, such as the pallet inverter, perform activities faster, more precisely and in a safe manner, compared to people.

2. Storage Space Management

Storage space – that is premium real estate property for companies. However, in many warehouses it is still wasted by old, damaged packaging materials and inefficient storage solutions for merchandize. Another issue with storage space management is failure to define traffic aisles both for employees and machinery. Labor accidents are prone to occur and they will cost you money, as well as reputation.

3. Old and Non-Recyclable Packaging Materials

A key element of logistics and supply chains is the batch of packaging materials in which companies ship their products. We have written extensively on the specific total cost of ownership for the packages themselves. But now we extrapolate the problem to the next level: high total cost of ownership for unreliable packaging materials affects your company’s supply chain budget as a whole.

Every extra cent you spend for special cleaning operations, repairs, replacement for your containers is a cent subtracted from your net profit. Also, every time your products need to be repackaged you incur extra costs.

Waste management is yet another costly issue at worldwide level. One-way packages and containers or crates which cannot be recycled need to be disposed by specialized companies. Some times, your customers have to deal with the disposal of the wastes, and you will incur another kind of loss – of reputation.

4. Failure to Build a Solid Relationship with a Professional Shipping and Packaging Company

Looking for the next supplier of shipping services or reusable packages takes time. This time, spent by a logistic manager and a few members of their team translates into money spent and onwards into one more item to add up to total cost of ownership. A long term relationship with professional suppliers is a constant assurance that you will get the best prices, terms and conditions, as well as obtaining professional advice which will help you curb down your total cost of ownership.

5. Damaged Products

Unreliable packaging materials and transportation services have a secondary negative impact on your total cost of ownership: through the products which are damaged in transit and returned by the customer. Each damaged item decreases your bottom line and chips away at your reputation and market share.

In conclusion, once you realize how much your stocks of products and fixed assets actually cost you, your company has made the first step towards reducing the total cost of ownership in logistics and supply chain.