The importance of analyzing Total Cost of Ownership in manufacturing

As the global economy becomes more digital and equipment costs can quickly overwhelm a business, the manufacturing industry is shifting toward a more dynamic strategy known as Total Cost of Ownership. To find out more about the topic, we spoke to Peter Zonneveld, senior managing consultant at Emixa.

In the traditional way of planning a manufacturing business, financial experts often focus mainly on visible expenses such as purchase prices, production costs, and delivery times. While these figures are essential, they represent only a small portion of the financial reality.

Calculating Total Cost of Ownership (TCO) is a way for companies to better understand the entire financial commitment of an investment from the first steps through its eventual retirement.

“In short, TCO provides organizations with financial insight that goes beyond acquisition price. It helps leaders avoid hidden costs, improve budgeting accuracy, and evaluate long-term return on investment,” says Zonneveld.

Taking a closer look at data

Total Cost of Ownership is not a new idea, but the rise of digital transformation has changed how it is managed. As machinery and manufacturing practices become increasingly connected and digitalized, it is essential to revisit and expand on this concept.

“For IT and business managers in manufacturing, TCO has become a key performance indicator for making better investment decisions, reducing risks, facilitating innovation and driving sustainable value creation,” adds Zonneveld.

“As digitization reaches the shopfloor and the potential of Industry 4.0 continues to unfold, the concept of a Digital Thread is becoming more and more relevant. The Digital Thread is a digital backbone that seamlessly connects data across the product lifecycle. By establishing a continuous flow of data, manufacturers can reduce errors, eliminate duplicate data entry, ensure full traceability, and enable data-driven decision making.”

Hidden costs behind cutting corners

TCO accounts for every expense incurred over the years, including the cost of hardware and software procurement, system implementation, employee training, and ongoing technical support. It also factors in less obvious costs, such as system downtime, productivity losses, and the final decommissioning of equipment.

By mapping these categories, organizations gain a realistic understanding of their investments. This insight is crucial because making decisions based on the acquisition price alone is often risky.

“A solution that appears inexpensive upfront may, over time, generate significantly higher operational or maintenance costs,” Zonneveld notes.

“In an industry where margins are under pressure, competition is fierce, and customer expectations continue to rise, organizations need a broader perspective. TCO provides that foundation by offering insight for cost optimization, risk management, and sustainable decision-making.”

Lessons from the factory floor

Real-world challenges can often reveal how important these comprehensive overviews really are. Zonneveld gives the example of a company in the food and beverage sector that managed its entire production line using a single, custom-built database.

Although the initial cost was low, the system carried a massive hidden risk because only one employee understood how to manage it. When that individual retired, the factory faced serious operational disruptions. This case demonstrates how hidden dependencies can become fragile and expensive if they are not addressed with a long-term digital strategy.

He gives another example, which shows how TCO is not only about preventing risks, but also about driving innovation.

“A manufacturing customer realized that instead of offering only standard products, they could expand their business by providing make-to-order solutions as an additional service,” explains Zonneveld.

“This required rethinking their value chain, machines and surrounding software landscape. Creating a framework to ensure scalability across multiple factories worldwide. By embedding TCO thinking into this journey, Emixa supported this customer in qualifying both the machinery and the supporting digital systems. Helping the customer to create a new business model while ensuring long-term operational efficiency.”

Strategies for modern calculation

Calculating these costs effectively requires a structured approach. Zonneveld points to a step-by-step process that begins with defining the scope of the investment and identifying all relevant cost categories.

Organizations then gather data from financial records and vendor contracts to quantify indirect costs like compliance risks or training needs. These expenses are typically analyzed over a period of three to 10 years. Comparing different scenarios, such as choosing between local servers or cloud-based platforms, helps companies find the most valuable path forward.

“Today, analytics can help us look into the future and help guide future decisions,” says Zonneveld.

“That includes predictive maintenance, AI analysis, and digital twins of machines or systems. By embracing these concepts, manufacturers can turn TCO into a strategic growth lever.”

Building a future-proof enterprise

Understanding the full cost structure provides a range of benefits, from better control over recurring expenses to the early detection of security risks. Integrating core systems such as enterprise resource planning is one way forward.

“Hidden costs often arise from siloed systems and manual data transfers,” notes Zonneveld.

“Integrating ERP, PLM, and MES enables manufacturers to create smoother information flows, resulting in fewer delays, better forecasting, and higher product quality. While this may sound straightforward, every organization faces unique challenges.”

Ultimately, managing the total cost of an investment is no longer just about cutting budgets. It is about having a more complete overview of the enterprise. By focusing on strategic goals and long-term value rather than just immediate issues, manufacturers can build a resilient roadmap. This alignment ensures that digital projects are not isolated events but are instead integrated efforts that deliver lasting value and a competitive edge in a modern economy.