Article 1: Part of the Beyond the Buyer series.
Total Cost of Ownership changed the way many companies evaluate purchasing decisions. Instead of choosing an asset simply because it has the lowest purchase price, TCO asks what that asset will cost over its full working life. The analysis may include maintenance, repairs, replacement, administration, disposal, and the operational disruption caused by poor performance.
That broader view can lead to much better decisions. A pallet that costs less but fails twice as often may not be the less expensive option. A piece of equipment with a low purchase price may prove costly if it requires frequent repairs or specialized service. TCO brought much-needed discipline to procurement, and it remains one of the best tools available for moving a business case beyond a simple price comparison.
For some supply chain investments, however, even a carefully prepared TCO analysis may not capture enough of the complete economic effect. The limitation becomes important when an innovation creates costs or benefits across several departments, companies or stages of the supply chain. The buyer pays for the innovation, but some of the return may appear in a warehouse maintenance budget, a carrier’s claims operation, a retailer’s receiving department or another part of the system entirely.
TCO can count many of the costs and savings experienced by the buying organization. It is less well suited to measuring economic effects that land elsewhere. This does not make TCO wrong or outdated. It means that some supply chain decisions require a wider analytical view.
Key Takeaways
| TCO still matters | Total Cost of Ownership gives buyers a much better picture than purchase price alone. |
| The buyer is not the system | Important costs and benefits may appear in other departments or spill over to supply chain partners. Ignoring these effects can make valuable supply chain procurement decisions seem uneconomical when they might increase overall value, system-wide. |
| MBAM widens the view | It maps who is affected, what changes, and which effects can be measured reliably. |
| Count costs too | A complete analysis must include displaced revenue and other negative effects, not just additional benefits. |
What TCO Gets Right
Before examining its limitations, it is important to recognize TCO’s contribution to procurement practice. Traditional purchasing decisions often placed too much emphasis on acquisition cost. The lower-priced product could win even when it required more repairs, lasted for less time or created additional operating problems.
TCO changed the basic question from what a product costs to buy to what it will cost the organization over its useful life. That shift encouraged buyers to consider durability, maintenance, operating expense, replacement frequency and end-of-life costs rather than treating purchase price as the only meaningful number.
The formal development of TCO in procurement is closely associated with the work of researcher Lisa Ellram in the 1990s. Her work gave purchasing professionals a structured method for identifying costs that traditional price comparisons overlooked. The approach remains valuable because these less-visible costs can be substantial.
A lower-priced pallet, for example, may create more product damage, equipment disruption and replacement activity. A reusable asset with a higher initial price may produce a lower cost per trip if it lasts longer and performs more consistently. TCO helps buyers identify these differences and compare alternatives over an appropriate period.
The difficulty arises when important economic effects do not all belong to the organization making the purchase.
The Boundary Around the Buyer
In most practical applications, TCO examines what an investment costs or saves the buying company. This is a sensible starting point because the buyer generally has access to its own purchasing records, maintenance costs, replacement history and operating data. It is also responsible for deciding whether the investment meets its financial requirements.
Supply chains, however, do not operate within one company’s accounting system. A pallet, container, tracking device or supply chain technology may pass through several facilities and affect numerous organizations. The company paying for it may experience only part of the total result.
Consider an IoT-enabled durable pallet. A TCO model might include its higher purchase price, expected service life, tracking subscription and reduced replacement requirements. It might also account for lower asset losses if the tracking system helps recover missing pallets. That would provide a useful and legitimate analysis of the buyer’s costs and savings.
The same pallet could also produce effects that are less likely to appear in that analysis. A logistics provider might conduct fewer product-damage investigations. A distribution centre might experience fewer equipment repairs and less housekeeping work caused by broken boards and debris. A retailer might receive more stable loads, while claims and insurance personnel might gain better documentation of where and when a damaging event occurred.
A proprietary reusable pallet program could also reduce or eliminate the pallet core revenue that a receiving facility previously earned from conventional GMA wood pallets. This would be a negative economic effect for the receiver, even though the shipper might benefit from greater pallet durability and control.
Some of these consequences may occur within the buyer’s organization but outside the procurement budget. Others may occur in a carrier, retailer, third-party logistics provider or other supply chain partner. A conventional TCO analysis may therefore be accurate within its chosen scope while still describing only part of the wider economic picture.
The broader question is not simply what the investment costs the buyer. It is what costs and benefits the decision creates across the parties that are materially affected by it, and how those positive and negative effects inform the initial procurement decision.
Internal Benefits Can Be Missed Too
The measurement problem does not always cross company boundaries. Sometimes the benefit remains inside the buying organization but appears in a different department or cost centre.
Procurement may pay more for a stronger pallet while maintenance receives fewer repair calls. Operations may experience fewer stoppages, claims staff may process fewer damage incidents, and housekeeping employees may spend less time clearing pallet debris. The company receives the benefit, but the benefit may never be connected to the purchasing decision that produced it.
This is an internal attribution problem. The necessary information may already exist, but it is spread across departmental systems that were created for different purposes. Procurement records show what the pallets cost, maintenance records show equipment repairs, and claims systems show product damage. None of those systems necessarily identifies how a change in pallet specification affected all three outcomes.
TCO can include these benefits when the analysis is broad enough and the information is deliberately assembled. In practice, however, many TCO exercises remain concentrated on costs that are most visible to purchasing and finance. The analysis may therefore miss savings already being realized elsewhere within the same organization.
Activity-Based Costing Helps, but Only Up to a Point
Activity-Based Costing, or ABC, can help uncover some of these hidden internal expenses. ABC traces costs to the activities that consume resources rather than allocating overhead broadly across products or departments. It then connects those activities to the products, assets or decisions that caused them.
Applied to pallet operations, ABC might identify the labor required to clear debris, repair damaged equipment, inspect unstable loads or respond to product-damage incidents. This information could strengthen a TCO analysis by showing that a low-cost pallet creates additional operating expense beyond its purchase and replacement costs.
ABC is therefore useful for understanding what happens inside an organization. It can extend the analysis into operational areas that procurement does not normally examine and reveal costs that remain hidden in broader accounting categories.
Its limitations are similar to those of TCO. ABC depends on access to detailed operating records, and those records normally belong to one company. A buyer may be able to examine its own maintenance and labour costs, but it is unlikely to have equivalent access to the records of a carrier, retailer or independently operated distribution centre.
No single company is likely to possess all the information required to calculate the complete economic effect across the supply chain. It may also have little incentive to undertake a detailed analysis of benefits received by other organizations. ABC can deepen the internal analysis, but it does not by itself solve the cross-company measurement problem.
What Is Missing
The gap is not another method for calculating the lifetime cost of an asset. What is missing is a structured way to identify and assess economic effects across all the parties materially affected by the decision.
This requires the analyst to identify who is affected, rather than looking only at the buyer and seller. The relevant parties might include warehouse operators, carriers, retailers, third-party logistics providers, claims departments, insurers, maintenance teams and other functions whose costs, workload or risk may change.
The analysis must then determine what changes for each party. The effects could involve labour requirements, product damage, equipment wear, asset loss, inventory, capital investment, customer service or revenue. Some will be positive, while others may create new costs or displace an existing source of income.
The final challenge is determining which effects can be supported with reliable data and how they should be combined. The analyst must avoid double-counting and distinguish between genuine new value and a transfer from one party to another. A saving for the buyer, for example, may sometimes correspond to lost revenue for a supply chain partner.
This is a more demanding exercise than conventional TCO, and it produces a different kind of answer. Instead of showing only whether the investment benefits the buyer, it reveals how the economic effects are distributed across the affected system.
What MBAM Adds
The Multi-Stakeholder Benefit Attribution Model, or MBAM, is a proposed framework for extending the analysis beyond the immediate buyer. It does not replace TCO. TCO remains the foundation for understanding what an asset costs over its useful life. MBAM expands the field of view by asking where else the economic effects appear.
TCO generally asks what an investment costs or saves the buyer. MBAM asks where the investment creates costs or benefits across the materially affected parts of the supply chain.
The framework begins by defining the scope of the analysis, including the affected parties, the period being examined and the types of economic effects to be considered. It then maps the stakeholders, which may include the buyer and seller, companies that handle the asset, and departments or organizations affected indirectly.
The next step is to identify the relevant benefit and cost streams. These may include asset expense, labour, product damage, loss, risk, inventory, capital, revenue and customer service. Each effect is then connected to a data source and a reasonable method of financial conversion, where such a conversion can be supported. The analysis should also state how confident the analyst is in the estimate.
Finally, the results are combined carefully. Transfers between parties must be separated from genuine new value so that the same benefit is not counted twice. Negative consequences must also be included, even when they make the proposed investment appear less attractive.
The objective is not to produce the largest possible return-on-investment figure. It is to provide a more complete and defensible account of what changes, where the effects occur and who experiences them.
Not Every Benefit Should Receive a Dollar Value
A wider analysis creates another challenge because some benefits can be measured more confidently than others. Asset replacement costs, loss rates, maintenance hours and damage claims may be supported by existing records and converted into monetary estimates with reasonable confidence.
Other effects are more difficult to value. Better decision-making, improved trading-partner relationships, organizational learning and reputational improvement may be real, but the path from the investment to the financial outcome can be difficult to isolate.
MBAM does not suggest attaching speculative numbers to every possible benefit. Instead, it distinguishes between benefits that can be quantified defensibly and those that should be acknowledged without being included in the financial total.
This allows the business case to recognize important effects without weakening its credibility through false precision. The resulting monetary estimate can be presented as a minimum defensible estimate rather than a claim that every possible benefit has been captured.
A separate qualitative discussion can explain the additional benefits that may exist but cannot yet be priced reliably. Decision-makers then receive a clear picture of what has been measured, what remains uncertain and where the financial total may understate the complete effect.
A Practical Starting Point
A company does not need access to every trading partner’s records before improving its analysis. The most practical place to begin is within the organization, using information that already exists.
For a durable tracked pallet program, this might include procurement records showing replacement frequency, tracking data showing asset losses and utilization, claims records showing product-damage incidents, maintenance records showing pallet-related repairs, and facilities records showing debris-cleanup labour.
The organization can then consider whether important effects also occur outside its own operations. A carrier may experience fewer damage disputes, a retailer may receive more stable loads, or a third-party logistics provider may have fewer handling interruptions. These external effects may not be immediately measurable, but identifying them can still influence pilot design, data-sharing agreements and commercial discussions.
A stronger business case can therefore be developed in stages. The organization can begin with effects that can be documented internally, add outside information where supply chain partners are willing to participate, and describe important but unquantified effects separately.
This approach will not produce a perfectly complete analysis. It can nevertheless provide a meaningful improvement over either a simple purchase-price comparison or a TCO study restricted to the most visible purchasing costs.
Better Analysis May Require Better Commercial Arrangements
Measurement alone does not solve every investment problem. An innovation can create substantial total value while providing too little direct return to the company being asked to pay for it.
A retailer, carrier or logistics provider may capture a significant part of the benefit, while the shipper or asset owner carries most of the cost. A more complete analysis may reveal why the investment has been difficult to approve without automatically providing a solution.
In these circumstances, the commercial arrangement may need to change. Shared-savings agreements, gain-sharing, outcome-based pricing or revised service terms can help align who pays with who benefits.
Better measurement shows where the value is created and where it is received. Commercial design determines whether the parties have a practical reason to support the investment.
Beyond the Buyer
Total Cost of Ownership remains a valuable procurement tool. It replaced simplistic purchase-price comparisons with a fuller understanding of an asset’s lifetime cost, and for many conventional purchasing decisions, that may provide an adequate basis for choosing among alternatives.
For innovations whose effects spread across departments and supply chain partners, however, the buyer’s cost represents only part of the economic picture. A more complete analysis should examine where benefits and costs appear, who receives them and which can be measured with reasonable confidence.
MBAM is one proposed method for organizing that broader assessment. It builds on TCO rather than dismissing it. The practical message is to continue calculating Total Cost of Ownership, while recognizing that the buyer’s total may not be the same as the supply chain’s total.
For the complete framework and supporting examples, visit the Beyond the Buyer resource hub or download Beyond the Buyer: A Multi-Stakeholder Framework for Evaluating the True Economic Impact of Supply Chain Innovation.
References
Ellram, Lisa M. “A Framework for Total Cost of Ownership.” International Journal of Logistics Management 4, no. 2 (1993): 49–60.
Ellram, Lisa M. “Total Cost of Ownership: An Analysis Approach for Purchasing.” International Journal of Physical Distribution & Logistics Management 25, no. 8 (1995): 4–23.
Cooper, Robin, and Robert S. Kaplan. “Profit Priorities from Activity-Based Costing.” Harvard Business Review 69, no. 3 (1991): 130–135.
Articles in this series:
Article 1: Why Total Cost of Ownership Isn’t Enough, And What to Do About It
Article 2: The Pallet Core Revenue Problem: Why Pallet Procurement Decisions Have Hidden Economics
Article 3: What We Can Measure, What We Can’t, and Why the Difference Matters
Rick LeBlanc, EMBA, is the founder and editor of Reusable Packaging News (subscribe to the free newsletter) and editor of Western Pallet Magazine. A supply chain journalist with more than 30 years of experience, he specializes in pallets, reusable packaging, material handling and related operations. Rick is co-author of Pallets: A North American Perspective and Pallets & Progress: A Collected History of Pallets and Palletized Handling 1922–1945. He is also an advisory board member of the Virginia Tech Center for Packaging and Unit Load Design. Read Rick’s full bio.
