What are the principles of Total Cost of Ownership?

Have you, as a transport operator, tried this to improve your business: Total Cost of Ownership? Total Cost of Ownership is one of the most fundamental tools used by transport operators – but one that unfortunately seldom yields the desired and potential results. Why is this and what can be done to ensure that the investment in a TCO measuring system pays off?

What are the principles of Total Cost of Ownership? Essentially all costs that are required to operate a fleet of vehicles and related equipment are added together in specific cost categories and then analysed to allow for actionable decisions to improve the performance of the business.

Total Cost of Ownership is one of the most fundamental tools used by transport operators

The primary costs measured relate to financing/purchasing of asset; service & maintenance; fuel/oil; driver; administration; telematics and sundry (roadworthiness, licensing, fines, tolls, etc.). To make any generic statements about the ideal distribution of the Total Cost of Ownership cost-categories is not advisable, with transport operations being so different in what they do.

The purpose of Total Cost of Ownership is for companies to deploy the PDCA cycle (Plan, Do, Check & Act)

However, the rule of thumb is that the fuel/oil bill is usually the biggest expense, followed by service and maintenance, and driver costs. It is interesting to note that the cost of the asset over a typical lifecycle of 5 to 7 years is dwarfed by the other “big hitters” such as fuel costs.

What benefit does Total Cost of Ownership hold for the typical transport business? The simple answer is that unless the information is properly used, the cumbersome calculation and analysis of Total Cost of Ownership (TCO) means relatively little.

The purpose of Total Cost of Ownership is for companies to deploy the philosophy of the quality assurance guru, Edward Deming, namely the PDCA cycle (Plan, Do, Check & Act) – just not for quality but for the different costs determining the effectiveness and efficiency of the productive assets used.

Tracking of the interest rate changing over time has little value, whereas the detailed focus on fuel (as the single biggest cost item) is definitely worth the effort.

This means that transporters essentially go through the PDCA cycle on a repetitive basis by determining what their current costs are (e.g. fuel, maintenance, etc.) and then seek to bring down these costs through interventions – and then to set the bar at a new improved level. TCO, therefore, is nothing more than a clever form of “benchmarking” with the past in order to see whether actions work in improving performance.

It is important to always consider that the point of measuring is not the measurement itself, but rather focusing on cost-items that can be influenced and reduced by intervention.

This means that a tracking of the interest rate changing over time has little value, whereas the detailed focus on fuel (as the single biggest cost item) is definitely worth the effort.

The collection and collation of the required data can take different shapes, ranging from “manual” all the way to “automatic” IT-enabled data-collection and evaluation

How does one implement and maintain a TCO improvement system? This is where it gets tricky as the transport operator has to ensure that whatever is set up, can be maintained over time and that the management of the business is willing to commit to the discipline of continuous improvement.

The collection and collation of the required data can take different shapes, ranging from “manual” all the way to “automatic” IT-enabled data-collection and evaluation. In most companies a hybrid form is probably applicable with some data (e.g. fuel card invoices) being transferred electronically, while other cost items such as fines, maintenance invoices, etc. are fed into the collation tool manually.

Total-Cost-of-Ownership-driven continuous business improvement works; it simply needs to be done continuously and with the necessary dedication and focus

If companies are serious about the deployment of TCO as a business management tool, then it makes sense to reduce the manual collection of data and invest in technology to facilitate this task.

The biggest challenge is, however, not the technology but rather for companies to stick to doing something as simple as TCO through the PDCA Cycle than jumping from one new fad to another in order to find the next silver bullet.

Total-Cost-of-Ownership-driven continuous business improvement works; it simply needs to be done continuously and with the necessary dedication and focus.