Total Cost of Ownership

What is the Total Cost of Ownership for reusable industrial packaging?

Summary

8 minutes reading time

Thijs Canjels

Business Innovation Manager

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.

What is Total Cost of Ownership for industrial packaging?

Total Cost of Ownership (TCO) is a calculation method that maps out all costs associated with the purchase, use, maintenance and eventual disposal of industrial packaging. Unlike simply looking at the purchase price, TCO gives you a complete picture of the actual costs over the entire lifespan of your packaging solution. For reusable industrial packaging, the TCO consists of various cost components:

Direct purchase costs: The initial investment in the packaging
Operational costs: Transport, handling, storage and logistics
Maintenance costs: Repair, cleaning and replacement of parts
Administrative costs: Management, tracking and inventory
Product protection costs: Damage rates and insurance
Disposal and recycling costs: Costs at the end of the product’s life cycle
Opportunity costs: Missed opportunities due to inefficient packaging

By including all these factors in your calculation, you get a realistic picture of what a packaging solution actually costs you. This helps you make better decisions that look beyond just the initial investment.

How do you calculate the TCO for reusable packaging?

Calculating the Total Cost of Ownership for reusable industrial packaging involves a number of logical steps. Start by identifying all cost components and then gather the data to arrive at a total calculation. Follow these steps for an accurate TCO calculation: Determine the expected lifespan of the packaging in terms of usage cycles or years Calculate the purchase costs including design, engineering and production Identify operational costs such as transport, handling and storage per cycle Estimate maintenance costs based on repair frequency and average repair costs Calculate damage costs by multiplying the damage percentage by the value of damaged products Add administrative costs for tracking, management and inventory Calculate end-of-life costs for disposal, recycling or reuse The basic formula for TCO calculation is: TCO = Purchase costs + (Operational costs per cycle × Number of cycles) + Maintenance costs + Damage costs + Administrative costs + End-of-life costs For different types of reusable packaging, the weight of each cost component varies. With robust flight cases, the purchase costs are higher, but the damage costs are lower. With lightweight transport packaging, the operational costs are often decisive in the TCO calculation.

Which factors influence the Dead On Arrival costs in the TCO model?

Dead On Arrival (DOA) refers to products that arrive damaged at the end user. This cost component has a major impact on the TCO of industrial packaging. DOA costs go beyond just the value of the damaged product; they also include replacement costs, administrative processing, reputational damage and customer satisfaction. The main factors influencing DOA costs are:

Packaging quality: Insufficient protection against shocks, vibrations or climatic influences
Transport conditions: Extreme temperatures, humidity or rough handling
Product characteristics: Fragility, sensitivity and value of the packaged product
Packaging design: Inadequate securing, incorrect materials or insufficient protection
Logistical complexity: Number of handling points and transport methods

Even a small DOA rate can significantly increase the TCO. Suppose you ship products with an average value of €10,000. With a DOA rate of 2%, this costs you €200 per shipment. On an annual basis with 500 shipments, this amounts to €100,000 in direct damage costs, not including indirect costs. Investing in high-quality, bespoke packaging can drastically reduce the DOA rate. A reduction from 2% to 0.5% in the above example would yield annual savings of €75,000, which often quickly justifies the higher initial investment in better packaging.

When is investing in premium reusable packaging cost-effective?

Investing in premium reusable packaging is cost-effective when the total savings over the product’s lifetime exceed the higher initial investment. The decision depends on various factors that you must carefully weigh against your specific situation. Premium packaging is usually cost-effective in these situations: High product value: When the contents are valuable, the risk of damage outweighs the additional packaging costs Frequent reuse cycles: The more often the packaging is used, the faster the investment is recouped Complex logistics chains: Where there are many handling points or international shipments, more robust packaging offers greater protection Critical applications: For medical equipment, defence equipment or precision instruments where failure is unacceptable Extreme environmental conditions: When exposed to moisture, temperature fluctuations or harsh conditions To determine the break-even point, calculate when the savings on damage, maintenance and operational costs offset the additional investment. For many industrial applications, this point lies between 10 and 25 usage cycles, depending on the specific circumstances. A practical example: a standard transport crate costs €200 with a lifespan of 20 cycles and a 5% risk of damage. A premium alternative costs €500 with a lifespan of 100 cycles and a 0.5% risk of damage. For products worth €5,000, you save €225 in damage costs per cycle ((5% – 0.5%) × €5,000). After just two cycles, you have already recouped the €300 price difference, whilst still having 98 additional usage cycles to spare.

What are the hidden costs in the TCO of industrial packaging?

Hidden costs are often overlooked in TCO calculations, but have a significant impact on the actual total cost of ownership. These non-obvious cost items can sometimes account for up to 40% of the total costs. The main hidden costs are:

Administrative overhead: Time and resources spent handling damage, returns and complaints
Stock costs: Capital tied up and storage space required for packaging stock
Downtime: Loss of productivity due to waiting times caused by damaged products
Reputational damage: Loss of customer trust and future orders due to repeated incidents of damage
Compliance costs: Adjustments to comply with changing regulations and certifications
Environmental impact: Costs of waste disposal and future environmental levies
Missed innovation opportunities: Sub-optimal packaging that hinders efficiency improvements

A concrete example of hidden costs is the time employees spend handling damage claims. If an employee spends an average of 3 hours handling a damage claim (including documentation, communication with customers, arranging replacements), and you have 50 damage claims per year, this amounts to 150 working hours. At an hourly rate of €50, this amounts to €7,500 in hidden administrative costs. Environmental impact is also becoming increasingly important in TCO calculations. Sustainable, reusable packaging reduces waste and CO2 emissions, which is not only good for the environment but also increasingly yields financial benefits through lower waste disposal costs and an improved reputation.

Conclusion

Total Cost of Ownership provides a complete picture of what industrial packaging actually costs you. By looking beyond the purchase price alone and including all cost components in your calculation, you can make better investment decisions. Premium reusable packaging may seem more expensive at first glance, but often delivers significant savings through lower damage rates, longer service life and reduced hidden costs. For complex products in sectors such as high-tech, medical or defence, where reliability is crucial, a thorough TCO analysis is indispensable. At Faes, we help customers every day to strike the right balance between initial investment and long-term savings, so they can choose the most cost-effective packaging solution for their specific situation.

Frequently Asked Questions

How can I analyse my current packaging costs to improve TCO?

Start by systematically recording all costs: purchase, transport, damage claims, repairs and administration. Then identify the largest cost items and focus on these for improvements. Consider a pilot with alternative packaging solutions and measure the results. Also involve operational staff in this process; they often spot practical opportunities for improvement that are overlooked in financial analyses.

What are the most common mistakes in TCO calculations for industrial packaging?

The most common mistakes are underestimating the lifespan of premium packaging, ignoring hidden costs such as administrative processing, and failing to include damage rates in the calculation. It is also often forgotten to factor in the impact of seasonal peaks on packaging requirements, as well as the depreciation of packaging over time. Ensure a comprehensive inventory of all cost components and base calculations on actual data rather than assumptions.

How does the choice of packaging material affect the TCO in the long term?

Material properties directly determine the lifespan, maintenance frequency and level of protection offered by packaging. High-quality materials such as reinforced plastic or aluminium have a higher purchase price but last much longer and offer better protection. Lighter materials reduce transport costs but may be more susceptible to damage. Also consider the conditions in which the packaging is used; some materials perform better in fluctuating temperatures or humid environments, which can significantly reduce the TCO.