Total Cost of Ownership helps companies make smarter make-or-buy decisions by revealing the full lifecycle costs behind packaging choices. By looking beyond purchase price, businesses can reduce hidden costs, improve supplier selection, and create long-term value.
Summary of this article
When making decisions about what to do in-house versus what to outsource, you probably focus mainly on the purchase price. But that initial price tells only a small part of the story. Total Cost of Ownership (TCO) gives you the full picture of what a decision actually costs over its entire lifecycle.
A thorough TCO analysis gives you insight into all the hidden costs involved in make-or-buy decisions: from initial investments to maintenance, training and end-of-life disposal. This helps you make smarter choices that are genuinely cost-effective in the long term.
Total Cost of Ownership is a financial analysis method that maps out all the costs of a product, service or decision over its entire lifecycle. When it comes to make-or-buy decisions, TCO helps you look not just at the purchase price, but at the full picture of costs and benefits.
TCO is important for make-or-buy decisions because it reveals hidden costs that you might otherwise overlook. Think of training costs for new processes, quality control, storage costs or the time your team spends managing suppliers. A cheap solution can ultimately work out more expensive when you take all the associated costs into account.
For industrial packaging, for example, it might seem cheaper to make wooden crates in-house. But if you factor in the costs of materials, tools, training, quality control and your staff’s time, outsourcing to a specialist can be much more cost-effective. TCO helps you base these kinds of decisions on facts rather than assumptions.
TCO analysis shifts the focus of procurement teams from the lowest price to the best long-term value. Instead of looking solely at the purchase price, teams now evaluate suppliers based on total costs and performance throughout the entire partnership.
This shift changes how you select and evaluate suppliers. You’ll place greater value on reliability, quality and service levels. A supplier who is 10% more expensive but causes 50% fewer faults suddenly becomes a much more attractive option. TCO analysis forces you to look beyond first impressions.
It also changes your negotiation strategy. Instead of discussing price alone, you’ll discuss service levels, warranties, training support and other factors that influence total costs. You can even enter into performance-based contracts where suppliers are rewarded for reducing your total costs.
A comprehensive TCO calculation includes all direct and indirect costs throughout the entire lifecycle: purchase, implementation, operational costs, maintenance and end-of-life disposal. These costs fall into different categories, each of which has its own impact on the total cost.
Direct costs are usually the easiest to identify. These include your purchase costs, installation costs, training costs and licence fees. But don’t forget the less obvious costs, such as internal project management, a temporary drop in productivity during implementation and any adjustments to existing systems.
Indirect costs are often the biggest surprise in TCO calculations. Consider the time your team spends managing suppliers, carrying out quality checks, resolving issues and maintaining documentation. Risks also play a role: what will it cost you if a supplier drops out or if quality issues arise?
Operational costs continue throughout the entire service life. These include maintenance costs, energy costs, storage costs and the cost of replacement parts. For packaging solutions, for example, you must also take into account the costs of return logistics and the reuse of packaging.
For packaging and industrial solutions, you calculate TCO by dividing all costs over the expected lifespan by the total volume. Start with the purchase costs and, step by step, add all operational costs, maintenance and end-of-life processing to arrive at a cost per unit.
Start by assessing your current situation. What does your current packaging process actually cost? Include not only material costs, but also labour, storage, transport and waste disposal. For reusable packaging, you must also factor in the costs of return transport and cleaning.
When evaluating alternatives, consider different scenarios. A more expensive reusable packaging solution can work out much cheaper than disposable packaging over 50 cycles. However, you must then factor in the costs of tracking, cleaning and the risk of loss or damage.
Don’t forget to factor in the ‘soft’ costs either. How much time does your team spend managing packaging suppliers? What are the costs if a consignment arrives damaged due to poor packaging? These costs are more difficult to quantify, but can have a significant impact on your TCO.
TCO differs from other cost methods in that it takes into account all costs over the entire lifecycle, whereas methods such as purchase price analysis or annual budgeting only look at specific time periods or cost types. This provides a much more complete picture of the actual costs.
Purchase price analysis only considers the initial cost of a purchase. This is useful for one-off purchases, but can be misleading for decisions with long-term implications. A cheap machine can end up being expensive due to high maintenance costs, whilst a more expensive machine may prove cheaper in the long run.
Return on Investment (ROI) calculations focus on the financial returns from an investment, but do not always take all costs into account. TCO provides the cost side of the equation, which you can then combine with ROI to get a complete picture of the business case.
Activity-Based Costing (ABC) is useful for understanding process costs, but usually looks at the current situation. TCO helps you to compare future scenarios and assess the impact of changes. Both methods complement each other well when making complex decisions.
At Faes, we use Total Cost of Ownership as a practical tool to help companies decide which packaging activities should stay in-house and which can be better managed by a specialist partner. For complex industrial, high-tech or defence-related applications, the lowest purchase price is rarely the best decision. Packaging often affects engineering time, logistics efficiency, product protection, compliance, repair flows, storage, reuse and operational risk.
Faes combines packaging development, custom engineering, production, assembly, system integration and testing into one integrated approach. This means we do not only supply a case or packaging solution, but help define the technical and operational requirements behind it. Where needed, we support customers with specifications, documentation, norm-related questions and robust solutions for mission-ready or critical applications.
This makes the make-or-buy decision more transparent. By working with Faes, companies can reduce internal complexity, avoid hidden lifecycle costs and create packaging solutions that are reliable, reusable and aligned with their operational processes. In that sense, Faes is not just a packaging supplier, but a strategic partner that helps turn packaging from a recurring cost into a controlled, value-adding part of the supply chain.
TCO analysis improves supplier selection by helping you compare suppliers on total value rather than price alone. You can make performance indicators such as reliability, quality and service levels measurable and factor them into your decision, leading to better long-term partnerships.
When selecting suppliers, you use TCO to compare different offers fairly. A supplier with higher prices but better service levels may ultimately be cheaper. You can also run through different scenarios: what happens to your TCO if a supplier achieves 95% on-time delivery instead of 90%?
TCO provides you with strong arguments for negotiations. Instead of just talking about price, you can demonstrate which service levels or guarantees add real value. You can also create win-win scenarios where suppliers are rewarded for improving your TCO, for example through better packaging that reduces transport damage.
TCO also helps when setting up performance contracts. You can agree on service levels, quality indicators and even total cost targets. This ensures that suppliers are incentivised not only to optimise their own costs, but also to reduce your total costs. At Faes, we help companies with packaging management strategies that enable precisely this kind of TCO optimisation.
Start by selecting a pilot project with clear, measurable costs and a defined timeline. Gather a cross-functional team including procurement, finance, and operations to identify all cost categories. Begin with readily available data and gradually expand your analysis as you build confidence and refine your methodology.
The biggest mistakes are underestimating indirect costs like management time and risk factors, using overly optimistic assumptions about product lifespan, and failing to account for inflation or changing business requirements. Many companies also ignore the opportunity cost of internal resources spent on managing suppliers or processes.
Project costs over the realistic useful life of the product or service, typically 3-7 years for most business decisions. For packaging solutions, consider the expected volume and frequency of use. Use sensitivity analysis to test different timeframes and account for uncertainty by creating best-case, worst-case, and most-likely scenarios.
Convert intangible costs into measurable business impacts where possible. For reputation risk, estimate potential revenue loss or customer acquisition costs. For employee satisfaction, consider turnover costs, training expenses, and productivity impacts. When quantification isn't feasible, document these factors qualitatively alongside your TCO calculation.
Focus TCO analysis on strategic decisions with significant long-term impact, high spend categories, or complex supplier relationships. For routine, low-value purchases, a simplified cost comparison may suffice. Prioritize TCO for decisions involving new technologies, critical business processes, or when switching between make-or-buy options.
Review TCO calculations annually or when significant changes occur such as volume fluctuations, new technology availability, supplier performance issues, or changes in business requirements. Set up regular performance monitoring to track actual costs against projections and adjust future calculations based on real-world data.
Excel remains popular for basic TCO modeling due to its flexibility and familiarity. For more complex analyses, consider specialized procurement software like SAP Ariba, Oracle Procurement Cloud, or dedicated TCO tools like Gartner's TCO worksheets. The key is choosing tools that match your analysis complexity and organizational capabilities.
Thijs Canjels is Business Innovation Manager at Faes and specializes in packaging management and supply chain optimization. In his blogs, he shares insights on efficiency improvements, cost savings and the strategic role of packaging in modern supply chains.
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