Have you ever heard the expression “cheap is expensive”? The TCO (Total Owner Cost) model is a powerful tool for the task of identifying whether the price offered by suppliers is the ”optimal” or answering that uncomfortable question from end users: Are we buying well? It even allows the management of the purchasing area to be defended against questions about why it was purchased at a higher price, resulting in an extra cost, or why a comparison with the available budget was not taken into account, which does not allow us to know the true impact on the business thinking about the complete life cycle.

Estimating the TCO model is not an easy task in most cases and its demonstration requires good analysis.

Key aspects in the TCO model

In this real life case, purchasing steel for a construction, you will see the aspects to consider for the TCO model.

Initial Cost

This is perhaps the stage of the TCO model that requires the least effort and in which you have the most control, as long as clear and unique pricing rules are established.

1. Design and engineering

In the design process, construction plans are issued that include the breakdown of the steel , that is, the detail of the steel figures. Preparing orders for the supplier involves creating booklets, which require the time of professionals with specific knowledge.

2. Logistics and transportation

Check if it includes transportation and what the conditions are. In the case of steel, normally the higher the volume, the shipments have a lower price. However, it must be taken into account that this implies having large volumes of space within the project for adequate storage.

3. Storage

 In this case, and assuming that the space is available, it involves performing a double haul. That is, it is required to unload from the loading vehicle to the storage space and then distribute to the different levels of the building. This involves hours of the tower crane and the operator to carry out this activity, as well as specific planning , so that when it is stored, what is going to be consumed the fastest is easily accessible.

4. Maquila

 In the case of steel, it may happen that the imported material has a lower initial price, but it implies larger volumes and standard measurements. This means that a maquila must be implemented to work the steel as required by the project, therefore, this requires having dedicated and specialized teams within the project to carry out this activity or subcontract, which implies additional transportation and logistics costs : Port – figuration plan – project.

5. Market variables

The price of steel is impacted by variables such as the TRM. For this reason, financial operations must be carried out with the aim of stabilizing and controlling prices, total volume, dispatch schedules, quantities per dispatch, unloading time, among others.

6. Administrative costs to support the operation

Quality tests for steel acceptance are provided by the manufacturer and must have correct traceability and registration . At this point, administrative team costs should be considered, organizing stationery effectively through physical folders and considering shelves for correct arrangement.

Life cycle costs

Assuming that in the first phase of the TCO model, and that based on conditions of equality in the suppliers’ quotes, the initial costs could be identified, we moved on to the stage of installing the steel within the building.

1. Administration

Before installing the steel, and assuming that the steel was stored correctly, 24-hour surveillance and custody costs must be considered , given that the loss of any of the pieces represents considerable delays in the schedule and the request for the supply of parts. punctual services usually have high times and costs.

2. Setup

Steel is normally stored outdoors; for this, costs of wooden supports where the steel and large plastic are supported must be considered to avoid excessive contact with water.

3. Inspection and quality assurance

If oxidation phenomena occur , steel cleaning costs must be considered before installation, which implies having the human resources and material necessary to carry out the activity and requesting approval from trained personnel.

4. Adaptation for field failures

Due to the type of storage, it is common for twists to occur in the steel and these must be corrected before installing. In this case, specialized equipment is required to correct these defects and trained personnel to perform the operation.

5. Consumable

 Annealed or burnt wire is a consumable in the steel installation activity ; in this case it is possible to buy complete reels, which involves making special cuts on site to have the necessary segments to tie the steel. This involves having cutting tools available and man hours making the necessary adjustments to the wire wheels.

Additionally, to tie the steel, devices are used that are composed of steel tubes, bearings and pieces of steel, assembled in a specific way and which consequently have an acquisition cost.

6. Operational processes

 In construction, the use of prefabricated structures is common , that is, putting together everything possible ahead of time with the aim of optimizing time. In the case of steel, it is common to build the steel structure, for example with a column on the floor, and then hoist the entire column with the help of cranes, which involves costs and time.

7. Waste

 When straight steel is purchased, it needs to be cut and bent directly in the project (steel figuration), generating a considerable amount of excess material, which can be used to make, for example, safety railings, supports for structures, etc The final disposal of this material also requires logistics and transportation.

Owner cost

Finally, with the building built, there are some additional costs to factor into the TCO model.

1.Modifications

If it is necessary to make adjustments to the building, either through extensions or corrections due to cracks, it is necessary to carry out an engineering study where all the steel used in the construction phase must be evaluated and if adequate historical information is not available, They must carry out specialized studies, which involve high costs.

In the case of repowering due to structural failures, designs are required that contemplate destroying existing structures.

In the previous example, an attempt was made to address all the phases of the life cycle of a purchase, the calculation of which is possible through a deep knowledge of the purchase categories and is achieved with buyers who know each of the stages and who have made a true immersion in the operation and impact of purchasing processes.