Before You Buy, Know What You’ll Really Pay!

10/07/2025 jessica Comments 0 Comment

Total Cost of Ownership (TCO) is one of the key concepts in CIPS knowledge. CIPS often includes multiple-choice questions and essay prompts on TCO in its exams, highlighting its importance for procurement professionals. In fact, many purchasers rush to sign on a contract with a supplier who offers lowest price. However, this impulsive decision can lead to additional costs for the buying organization. The supplier offering the lowest purchased price often turns out not to be the best one. Clearly, identifying total costs is not a quick taskn and buyers must invest time in research and communication with suppliers to gain a comprehensive understanding of all associated costs. This is why TCO is often considered when purchasing assets or high-value items.

As you know, TCO typically includes five components: acquisition costs, operating costs, maintenance costs, downtime costs, and end-of-life costs. The role of the buyer is to identify these costs as accurately as possible.

Acquisition costs

Normally, acquisition costs include:

Purchase price: This often refers to the cost shown in the quotation. Many buyers mistakenly believe that this is the only cost they will incur during the asset’s period of use.
Administration costs: Before receiving the orders, the buying organization must complete several tasks to ensure the purchase meets the five rights of procurement: the right quantity, right quality, right price, right time, and right place. Upon receiving the requisitions, buyers must collaborate with relevant parties to develop specifications. They then conduct market analysis and qualify suppliers to select the best one. This process requires significant time and effort from the buyers.
Installation costs: When a company purchases assets such as machines, it may incur installation or setup fees, as installation can take several days. These costs cover spare parts and wages for the supplier’s staff members who are sent to the buyer’s premises to complete the installation.
Training costs: Initially, the buying organization may not be familiar with operating the machines. The supplier typically sends staff members to the buyer’s premises to provide training and instruction.

Operation costs

This refers to the costs of operating assets such as machines or buildings. These costs can include:

Utilities: Most machines require electricity or even water to function.
Labor: The purchasing organization must hire workers to operate the machines. Not every machine is fully automated, and many still require human involvement.
Consumables: Machines may need coolants and lubricants to operate smoothly. Coolants help dissipate heat, while lubricants reduce friction. Some machines also require oil and air filters to remove contaminants.

Maintance costs

Many machines need to be maintained periodically to optimize their productivity. The maintenance costs can include:

Repairs & Servicing: Buyers must pay fees for replacing spare parts and components or for cleaning the machines.
Warranty Extension: When the standard warranty expires, the buyer may sign an optional agreement to protect their machines against defects and malfunctions.

Downtime costs

The buyer should consider worst-case scenarios, such as machine breakdowns. These can lead to prolonged production disruptions, causing the organization to incur productivity losses. They may even lose major contracts if they cannot fulfill customer orders within the required timeframe.

When machines break down, buyers may face costs related to emergency repairs and replacements. Not all components are readily available, and the company may have to wait a long time for the issue to be resolved.

End of life costs

Buyers rarely consider these costs. They often assume they can dispose of assets anywhere at no cost. However, for large machines or buildings, the buying organization may need to hire workers to decommission the equipment. In many countries, buyers must also pay fees to dispose of scrap in an environmentally responsible manner.

For certain machines, buyers must conduct data migration, which can require significant time and effort.

There are many hidden costs associated with purchasing high-value assets. If you fail to identify all potential expenses, you may face unexpected costs and your budget overruns.

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