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Understanding the Total Cost of Ownership in Packaging

What is Total Cost of Ownership (TCO) and Why Does It Matter?

When a business is considering investing in new equipment, one of the most important questions to ask is whether the purchase will deliver a strong return on investment (ROI). The most accurate way to answer that question is to calculate the equipment’s total cost of ownership (TCO). Total cost of ownership is a term used to describe the full long-term expenses associated with acquiring, operating, and maintaining a piece of equipment throughout its lifetime.

With packaging machinery, this means considering ongoing maintenance and repair costs, energy consumption, operator training, and the cost of packaging materials. Understanding the direct and indirect costs associated with new equipment is the best way to predict your ROI and make informed investment decisions.

Why Does TCO Matter in Packaging?

For many businesses, packaging is an unavoidable expense that plays a large role in operational efficiency and revenue generation. Packaging methods directly influence whether or not products ship safely and on time, and also impact labor requirements, operation costs, and much more. Taking the time to calculate the total cost of operating packaging equipment allows businesses to determine which option will be the most economical to run and maintain, helping to maximize profitability and improve competitiveness.

Key Elements of TCO in Packaging

For packaging equipment, finding total cost of ownership involves evaluating three main expense areas: acquisition costs, operational costs, and disposal costs.

Acquisition Costs

Acquisition costs are the most straightforward aspect of calculating TCO. They include the costs associated with purchasing the packaging equipment itself and any related items required for operation. While many businesses assume a machine’s purchase price reflects the total cost of their packaging investment, it’s actually only one part of the true cost of ownership.

Operational Costs

Once acquisition costs are determined, the next step is to evaluate your equipment’s operating costs. These ongoing expenses make up a significant portion of the total cost of ownership and are required to keep your equipment running efficiently. For example, common operational costs include:

• Energy costs. The price of electricity used to run your equipment.
• Maintenance and repairs. All machinery requires ongoing preventative maintenance to keep it running at its best. Certain components may also need to be replaced or repaired throughout the equipment’s lifetime.
• Training and payroll expenses. Consider whether you’ll need to hire additional staff to run your new equipment and factor in the time and resources you’ll need for training.

In addition to the expenses previously mentioned, you should also consider the efficiency of your packaging processes. Inefficient packaging methods slow down your output, increasing payroll expenses. Taking the time to consider indirect costs like these will help you find ways to improve the efficiency and profitability of your operations. Since operational costs vary widely depending on the equipment involved, your production volume, and other factors, the calculation requires careful consideration.

Disposal Costs

One often overlooked aspect of TCO is disposal costs. Over time, all machinery loses value and functionality. When your equipment reaches the end of its lifespan, you will be responsible for its disposal and any associated expenses. You’ll need to review the regulations in place for your industry to determine how your equipment can be safely disposed of or properly recycled. You can also consider whether or not resale is an option. No matter what disposal method you choose, the unavoidable associated expenses should be factored into your TCO analysis.

Calculating TCO for Packaging

The formula for calculating packaging TCO can be complex because certain parts of the packaging process are consumable. However, you can get a good start by considering basic factors like initial costs, maintenance costs over five years, and the remaining value of the equipment after five years. Begin with the initial cost and then add the expected maintenance costs. From this, subtract the remaining value after deprecation to obtain the total cost of ownership.

Partner with Alpha Packaging

The right packaging equipment can dramatically improve your operation’s efficiency and profitability, but making a smart investment requires a good understanding of the total cost of ownership. As a leader in corrugated box manufacturing solutions, Alpha Packaging delivers custom packaging systems that help companies improve their operations. With over 200 years of combined experience, our experts are here to help you select the right machinery for overcoming industry-specific challenges. Contact us with any questions or request a quote to get started.