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Trying to compare apples to apples on costs
June 17, 2011
Dear Control Engineering: In the process of evaluating a control system upgrade, one of the bidders is suggesting we look at TCO. What’s that about?
When purchasing anything much more complicated than a cup of coffee, an informed purchaser needs to think about anticipated costs of owning something that go beyond the original purchase price. For example, when you consider buying a car, you need to quantify factors related to gas mileage and maintenance over the vehicle’s life. While one car may be cheaper than another, you might end up giving the savings back at the gas pump or in higher maintenance costs.
The same is true for more complex pieces of industrial equipment. A common example is an electric motor. Manufacturers stress that the cost of electricity to run the motor over its life is many times greater than the purchase price. So the manufacturer of a more expensive but more efficient motor may make the point that while the purchase price is indeed higher, you will actually save money over the long term because you will spend less on electricity. This method of evaluating all the costs associated with an asset over its entire working life is called TCO (total cost of ownership). Another term that is similar, if not the same, is lifecycle costing.
This methodology has been growing in popularity with companies that sell such equipment as they seek to differentiate products and services from competing suppliers. Like the motor manufacturer, your prospective supplier companies will try and identify all the costs connected with a given asset to make you recognize what the real cost will be in the long term. This effort to contextualize the purchase price helps you as the purchaser make a more informed decision. While this is certainly a useful exercise, it will probably not give you a 100% accurate picture of competing options. Different suppliers may calculate costs differently, and these may not match with your own internal attempts to do the same. It is an imperfect process, but far better than taking a wild guess. It is a good idea to compare and contrast the various offers in light of your own experiences. Your prospective vendors may help you develop a better picture of the true costs over time than you might have done alone. The process may also help you get a more direct and accurate comparison of competing offers, allowing a more rational purchase decision based on reliable data.
Honeywell has produced a more extensive discussion of the process that you can download.
Peter Welander, pwelander(at)cfemedia.com