What Is Total Cost of Ownership and How Do I Reduce It?

reduce total cost of ownership

Usually, when we hear the term total cost of ownership, we think of the costs associated with owning a car or a computer. Total cost of ownership (TCO) is typically applied to large purchases that experience the wear-and-tear of everyday use. But, did you know that this term, describing all of the costs associated with a purchase, can be applied to a retailer’s inventory, too?

Here’s What to Look For

There may be costs associated with the purchase of some items that make them less profitable than others. With every new purchase, TCO should be factored into the decision-making process. Below is a list of costs to consider when trying to reduce total cost of ownership:

1. Vendor Selection

When selecting a vendor, the time spent bidding and approving them needs to be included into your costs. Online ordering processes are less time consuming than traditional, in-person meetings. Selection costs also include “Buyer’s Clubs” and other co-ops that improve your purchasing power, while requiring an annual fee.

2. Purchasing

This is simply the costs associated with placing an order. There may be taxes and fees that accompany every purchase, which are good to know for future purchases, as well.

3. Shipping

Any costs for packaging and shipping need to be included in your total cost of ownership. This is an area where you can negotiate lower shipping costs to improve profitability.

4. Receiving

The time you and your employees spend receiving inventory, unpacking, and placing it onto the shelves should be factored into the total costs of the item. This is where an automated system and proper employee training can really cut down on costs.

5. Holding Costs

The warehouse space, whether it is rented or owned, has a total cost per square foot. These costs also include any charges and fees related to financing your purchases, as well as maintaining and protecting the inventory, so it’s in great condition.

6. Shrinkage

Some products have a shorter lifespan than others. When they no longer sell, then they become obsolete and need to be removed from the shelves. Inventory losses due to theft and breakage also need to be calculated in the total costs.

Here’s Why It’s Important

When you calculate the total costs of ownership, you’re able to decide which vendor truly offers the best pricing on their products. Some may offer deals on shipping, while others have better pricing. Either way, you’ll know which is best after you understand the total cost associated with your purchases.

This is also a great way to analyze where you need to improve your inefficiencies. Examining how you receive products and how long they take to sell are an important part of the equation. Automated systems and employee training are perfect areas to start cutting down on unnecessary expenses. Once you have a more complete understanding of the total costs of your inventory, you’ll have a better understanding of how well your business is running.

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