Total Cost of Ownership (TCO) calculations often go wrong in procurement because teams focus on the purchase price rather than on all costs over the lifetime of a product or service. This tunnel vision leads to costly surprises later in the process, ranging from unexpected maintenance costs to inefficient operational processes.
Most procurement professionals will be familiar with this scenario: you think you’ve secured a great deal, but after a year, the actual costs turn out to be much higher. By recognising and avoiding these common TCO mistakes, you can create real value for your organisation.
What is TCO and Why Do Procurement Teams Get It Wrong?
Total Cost of Ownership (TCO) is the total cost of a product or service over its entire lifecycle, including purchase, implementation, maintenance, training and disposal at the end of its life. Procurement teams make mistakes because they focus on the lowest initial price rather than the total costs over time.
Most procurement departments still operate using traditional purchasing methods that prioritise the purchase price. This is often due to time pressure, a lack of data, or organisational structures that reward short-term results. The problem is that this approach obscures the true cost of an investment.
A TCO analysis requires a broader view of all cost components: from staff training to energy consumption, and from spare parts to downtime. Teams lacking this holistic approach make decisions based on incomplete information.
What Are the Most Expensive Hidden Costs in Procurement?
The most expensive hidden costs in procurement are maintenance and support (often 30–50% of total costs), training and implementation, downtime due to breakdowns, and energy or operational costs that continue for years.
Maintenance costs are systematically underestimated. A machine costing €100,000 may require €150,000 in maintenance over five years. Support contracts, spare parts and preventive maintenance add up to amounts that exceed the original investment.
Training is often seen as a one-off cost, but with complex systems, ongoing training is required. New staff, software updates and process changes demand continuous investment in knowledge and skills.
Downtime costs far more than the immediate repair costs. Production stoppages, missed deadlines and customer dissatisfaction have a multiplier effect that is difficult to quantify, but which certainly impacts your bottom line.
How Do Supplier Selection Mistakes Impact Long-term TCO?
Incorrect supplier selection increases TCO through higher service costs, longer lead times, quality issues and a lack of innovation or support. Suppliers offering the lowest price often have the highest total costs due to inefficiencies and limited service.
Cheap suppliers cut corners on service and support. This means longer response times when problems arise, limited technical expertise and minimal proactive support. These cost-cutting measures are passed on to you in the form of higher operational costs.
The geographical location of suppliers also influences the TCO. A supplier from a distant country may have lower production costs, but transport, customs, stock management and communication issues drive up the total costs.
Suppliers lacking innovation capacity become more expensive in the long run. They cannot keep pace with your needs, deliver outdated solutions and miss out on opportunities for process optimisation that could save costs.
Why Do Companies Underestimate Operational and Maintenance Costs?
Companies underestimate operational and maintenance costs because these costs span several years, are difficult to predict and are often not directly linked to the original purchasing decision. Furthermore, there is a lack of historical data to make accurate estimates.
Operational costs are often variable and dependent on usage patterns that only become clear after implementation. Energy consumption, consumables and staff deployment fluctuate with business activities, which makes accurate TCO calculations difficult.
Organisations have different departments that manage different cost components. Procurement handles purchasing, IT manages systems, facilities pays for energy, and operations bears maintenance costs. This fragmentation makes it difficult to bring all costs together.
Psychologically speaking, people focus on tangible, immediate costs. An invoice for €50,000 feels more concrete than maintenance costs spread out at €5,000 per year over ten years, even though the total costs are identical.
What’s the Difference Between Price-focused and Value-focused Procurement?
Price-focused procurement focuses on the lowest purchase price, whilst value-focused procurement looks at the total value over the product’s lifecycle, including quality, service, innovation and strategic benefits. Value-focused procurement delivers a lower TCO and better business outcomes.
Price-focused procurement relies on simple comparisons: who offers the lowest price? This approach is quick and straightforward, but ignores important factors such as reliability, flexibility and future-proofing.
Value-focused procurement evaluates suppliers against multiple criteria. Quality, service levels, innovation capacity, sustainability and strategic fit all factor into the decision. This requires more time and expertise, but leads to better long-term results.
The shift towards value-based thinking means entering into partnerships rather than transactions. You invest in suppliers who contribute to your strategic goals and grow and innovate alongside you.
How Can Procurement Teams Avoid These Common TCO Mistakes?
Procurement teams can avoid TCO mistakes by applying systematic TCO analyses, encouraging cross-functional collaboration, collecting historical data and developing supplier partnerships that go beyond mere price competition.
Start by developing TCO models for your key procurement categories. Identify all cost components across the entire lifecycle and make these transparent to stakeholders. This creates awareness and support for a broader view of costs.
Collaborate with other departments to map out all costs. Finance has insight into operational costs, IT knows the system requirements, and operations knows what maintenance costs. By combining this knowledge, you gain a complete picture of the actual costs.
Invest in data collection and analysis tools. Without good data, you cannot make accurate TCO calculations. Track costs by supplier, by product category and by project to identify patterns and improve future decisions.
At Faes, we understand that effective
packaging management goes beyond just the purchase price. By looking at the total costs of packaging solutions over their entire lifecycle, we help our clients realise real value in their supply chain.
Frequently Asked Questions
How do I get started with implementing TCO analysis in my procurement process?
Start by selecting 2–3 high-value or frequently purchased categories and create simple TCO templates that include acquisition costs, maintenance, training, and operational expenses. Collaborate with finance and operations teams to gather historical cost data, then pilot the approach on your next major purchase decision to demonstrate value before rolling it out organisation-wide.
What tools or software can help automate TCO calculations?
Popular TCO analysis tools include specialised procurement software such as SAP Ariba, Coupa, or GEP SMART, which offer built-in TCO calculators. For smaller organisations, customisable Excel templates or business intelligence tools such as Power BI can effectively track and analyse cost components across the asset lifecycle.
How do I convince stakeholders to accept higher upfront costs when TCO analysis shows long-term savings?
Present clear financial projections showing cumulative savings over time, use real-world case studies from similar purchases, and break down the cost difference into monthly or annual impacts. Create visual dashboards that demonstrate ROI timelines and highlight risk mitigation benefits such as reduced downtime and maintenance issues.
What is the biggest mistake companies make when trying to implement value-based procurement?
The biggest mistake is trying to change everything at once without proper change management. Organisations often fail to align procurement KPIs with TCO goals, continuing to reward buyers for achieving the lowest purchase price rather than the best total value. Success requires gradual implementation, stakeholder buy-in, and revised performance metrics that reflect long-term value creation.
How do I handle situations where suppliers won’t provide detailed cost breakdowns for TCO analysis?
Use industry benchmarks and historical data to estimate missing cost components, request references from existing customers to gather real-world operational data, and consider making detailed cost transparency a mandatory requirement in your RFP process. You can also work with preferred suppliers who are willing to share this information as part of strategic partnerships.
What are the warning signs that a procurement decision will have high hidden costs?
Key red flags include suppliers offering prices significantly below market rates, lack of local support infrastructure, proprietary systems requiring specialised training, complex integration requirements, and suppliers who are evasive about maintenance costs or service level agreements. Also be cautious of new technologies without established track records or suppliers with limited financial stability.
How often should TCO models be updated, and what triggers a revision?
Review TCO models annually or when major changes occur, such as technology updates, supplier changes, regulatory shifts, or significant cost variances from projections. Trigger immediate revisions when actual costs deviate by more than 15–20% from estimates, when new cost categories emerge, or when business requirements change substantially.
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