TCO Considerations Before Acquiring a Digital Press
Wonder what your cost per page will be after you purchase that multimillion-dollar inkjet web press? If you don’t, you should, because some post-purchase surprises can be very costly:
- Incorrect assumptions about price competitiveness on bids of high-volume work.
- Mistakenly believing that outsourcing services will save money.
- Calculations about profitability that don’t match year-end closings.
The common denominator that is related to and can help address all of these issues is a different TCO strategy: Total Cost of Operations.
Introduced in the late 1980s by the Gartner Group as Total Cost of Ownership, TCO has become a standard methodology for evaluating total costs. Originally a way at looking at the lifetime costs of owning computers or other IT components, TCO is relevant in printing, especially when using technologies such as production inkjet, calculating the cost per page for a fleet of copiers/printers, or analyzing various sourcing options.
Basically, TCO measures direct and indirect costs incurred throughout the lifecycle of a piece of equipment, including acquisition, deployment, operation, support and retirement.
What Constitutes Direct Costs?
Direct costs include initial purchase or lease expenses, which are divided by the expected life of the asset to derive an annual acquisition figure. Ancillary equipment costs - storage, network equipment, etc. - are included and maintenance contracts from vendors, spare systems and spare parts are added, as are annual costs of all supplies and materials.
Labor costs for technical operations, support and maintenance are factored in - both compensation and benefits - and fully loaded facilities costs for the share of the floor space and equipment purchased specifically for the project. Administrative costs are generally allocated to fleets and IT rather than print production, but should include share of costs related to support received from finance, human resources, administration and procurement departments.
Indirect costs are usually dispersed across the business operation’s organization. These include end-user operations - costs incurred when individuals gradually evolve to become part of the support structure, e.g., if JDF code must be loaded into a print MIS system to automate imposition or finishing equipment. A common indirect cost is downtime and costs associated with time when the equipment is idle.
Adding direct and indirect costs yields the Total Cost of Operations, and it can produce shocking results, such as an inexpensive desktop printer actually having an annual cost of $1,000 when all the supplies and maintenance costs are included.
TCO and Production Inkjet Printing
The original Gartner research was immediately relevant to analyzing sourcing options such as managed print services. Companies considering sourcing alternatives often use total cost analysis to calculate a more accurate cost per page for their fleet of copiers and printers, which they can then compare against costs of outsourcing.
And TCO is a critical component when comparing the cost per product for offset vs. toner or inkjet production printing. Expenses are different with inkjet, such as the cost of the equipment and finishing equipment, labor, paper and, in some cases, a binding agent.
The best way to compare the costs for different printing technologies is to calculate price/product (or page) based on the TCO of a specific application at specific volumes and then create a crossover chart that indicates when the cost per page for one technology is more or less cost-effective than another.
A mathematical model created by Jim Hamilton of Info-Trends (now a division of Keypoint Intelligence) helps illustrate TCO and the shifting burden of inkjet printing costs for equipment, paper, consumables and service as volume increases.
As the chart on the following page indicates, at five million impressions per month, equipment is the largest expense, almost one-third of the total cost per page, followed closely by the cost of paper. As volume increases, fixed costs such as equipment and monthly service fees become a smaller part of overall cost. For example, equipment drops from 33% at five million impressions to 8% at 30 million.
Costs related to click charges (or service) and ink increase as volume increases, both starting at about 15% and rising to 23% at 30 million impressions. Paper is the second largest cost component (at five million impressions) and accounts for close to half of the cost at 30 million impressions (volume discounts could reduce the cost of paper).
TCO Helps Determine Pricing, Profitability
Understanding TCO is the key to accurately calculating cost per piece, which is essential for commercial printers since it helps determine the most competitive price to charge and the profitability for various volumes.
Given the importance of accurate costing, we are constantly surprised when we discover that internal pricing is more often wrong than right. One reason is that most companies do not update their budgeted hourly rates (BHRs) and time standards annually.
While Total Cost of Ownership is appropriate for computers, in today’s printing business, Total Cost of Operations may be a better measure, since it can help companies:
- Understand and compare the costs and crossover points associated with different printing technologies.
- Calculate cost per page for a fleet of copiers/printers.
- Develop competitive pricing comparisons and analyze sourcing options.
Knowing the total cost of operations and determining which technology best suits expected applications can help buyers make the wisest equipment acquisition decisions and avoid post-purchase surprises.
Howie Fenton is an independent consultant who focuses on analyzing/benchmarking the performance of printing operations. Fenton helps companies use metrics, best practices and workflow strategies to streamline operations. Call (720) 872-6339 or email email@example.com