Traditionally, Total Cost of Ownership (TCO) has been a calculation intended to help buyers and owners determine the direct and indirect costs of procuring a product. In supply chain management, vendor managed inventory programs involve managing the process up to and including point of use on an assembly line. In this case, the calculation includes the direct and indirect cost of procuring a product but extends beyond the procurement process to include the costs incurred throughout the supply chain to assure a smooth integration into a final assembly.
The materiality and value of each component of the TCO in Supply Chain Management will vary significantly by item depending on specific characteristics, some of which include:
- Item value
- Minimum order quantities
- Material content
- Physical characteristics
- Method of delivery/lead time/freight and logistics
- Source of supply
- Volatility of demand
- Product life cycle/obsolescence
- Order processing costs
- Application
- Program management costs
- Opportunity costs