How do you secure healthy margins? Definitely a tough nut to crack. Especially in times like these, when numerous external factors – prices of raw materials and energy, logistic challenges, tariffs and much more – are the sources of instability or, even worse, work against you. But what can you do? Quite a lot, actually.
One way to be profitable is of course to increase revenue. Sell more, and/or sell it at a higher price. However, this brings us back to the unpredictability of the future. Customers might have problems if your products become more expensive. Increase sales, then? There are various ways to do that. Marketing campaigns and discounts, for example. But these activities do not come free, and their outcome is not guaranteed.
Instead, take a step back and look at things over time. Because over time, things change. Some external factors will probably stabilise. But if there is one constant in the world, it is this: new challenges will arise. Which these will be exactly? That is often difficult to predict. But this is why it makes sense to focus inwards, on things that are easier to control. Concentrate on costs instead of revenue. If you keep prices and sales volumes at the same level, cutting costs will – of course – improve your profit margins. But if something was ever easier said than done, it is reducing costs. To do that, you need to find ways to optimise your processes, supply chain and operations without impacting end-product quality, price, or sales negatively.
You will need a well-structured approach to how you look at your operations.
What is total cost of ownership (TCO)?
Total cost of ownership is a business metric to assess the total lifecycle cost of systems and the value chain costs.
The calculation helps to determine how a particular purchase will impact business expenses in the long term, taking into consideration both direct and indirect costs associated with a specific solution.
For example: a “particular purchase” can be a new piece of equipment, and the “specific solution” your production line
Securing efficiency with a TCO mindset
When you aim to optimise operational cost, TCO is the tool that shows you how the choices you make – or are considering – deliver on that goal. TCO provides a complete picture of the costs associated with owning or using an asset under the specific conditions your environment offers. In other words, it takes any ongoing costs of using an asset in your plant into account. This enables more informed investment decisions and helps in selecting options that are not just cost-effective at the time of purchase, but also throughout their lifecycle. A TCO analysis reveals potential risks with different choices, and factors in the value derived from an asset. It considers factors like efficiency gains and other benefits a higher-quality product may offer over its lifespan. It also provides a good platform for planning asset replacement and upgrades.
TCO’s cost item structure: Comparing apples to apples
In your TCO analysis, it is important that you work together with your potential suppliers and speaking partners to get a common understanding of your cost item structure. It is also important to understand how other factors may influence TCO. These factors include incoterms (International Commercial Terms), logistics costs, impact of customs duties in imported materials, and usage of special regimes (e.g., specific legal or administrative frameworks that deviate from general legislation) To have this established ensures the results can be displayed in a consistent and coherent manner. Or, to put it another way: you make sure you compare apples to apples and oranges to oranges.
As no plant is the other alike – at least not completely – your cost structure is uniquely yours. However, these cost categories are defined by corporate standard and a good base to consider:
It can be challenging to assess different suppliers, solutions, or technologies to find the best total cost of ownership for you. A good supplier focuses on and listens to your specific needs. But even so, all suppliers may not include exactly the same items or define them in slightly different ways. What is important here is that, again, you make sure you compare apples to apples – and that you understand when relevant comparisons are not possible.
Choosing the supplier that is right for you
When choosing your equipment or production solution supplier, it makes excellent sense to select a company that sees the big picture. Someone that prioritizes your long-term success and incorporates everything from the costs of the production line and packaging material to your running time, manning, service needs and all other components into the equation.
In other words, an ideal supplier delivers much more than “just” equipment. Focusing on efficiency, optimisation of resource utilisation, and reduction of downtime and waste can result in lower production costs. Improving quality enables cost reductions. Reducing water and energy usage not only saves money, but it is good from a sustainability perspective too. And optimisation of the supply chain, with shorter lead times and improved inventory management, also has a positive impact on TCO.
Look at it as a journey: if your supplier continues to work with you throughout your equipment’s life cycle and provides the service and expertise you need to optimise and keep your operations efficient over time, they will function as an enabler of the kind of decisions that benefit your business both financially and operationally.
It is not only about the product and packaging, the ingredients and processing, the equipment and services, or the automation and logistics. It is about understanding how every part connects as a single system.
A strict TCO approach ensures that your production continues to provide the value you are counting on.
