Total Cost of Ownership (TCO) in the purchase of spare parts for industry: beyond the unit price

Introduction: strategic importance of MRO inventory management

The effectiveness of technical maintenance, repairs and operations (MRO) management determines the continuity of Ukrainian industrial enterprises. In current procurement conditions, purchasing spare parts cannot be limited to searching for the lowest price per unit. The chief engineer and procurement department face the challenge of minimizing total production costs while maintaining high equipment reliability standards. According to the practice of UNITEC-D GmbH in Augsburg, the real cost of purchasing a component often constitutes only 15-20% of its total life cycle costs. The rest is attributed to logistics, storage, risk of downtime and administration. For Ukrainian plants in the cement, mining, metallurgy and food industries, the transition to total cost of ownership (Total Cost of Ownership, TCO) metrics is a critical requirement for survival on the market.

Problem: quantitative assessment of costs through inefficient inventory management

Inventory planning errors cause significant losses to Ukrainian manufacturers. The average volume of MRO costs for industrial enterprises ranges from 3% to 7% of the total value of plant assets per year. Incorrect inventory policy leads to two extremes: overstocking of the warehouse or shortage of critical components.

• Carrying Costs (Inventory Holding Costs): These constitute 20-30% of the cost of the goods annually. They include capital tied up in inventory, depreciation of premises, insurance, risks of obsolescence and damage.
• Stockout Costs and Downtime: A stoppage in cement production or raw material processing due to the absence of a bearing of a certain size or a hydraulic valve may cost between 5000 and 50000 euros per hour depending on the plant's capacity.
• Administrative costs: Processing hundreds of small orders per month from various suppliers creates a significant workload for the purchasing department.

In the table below, a comparison of the traditional approach of purchasing at the lowest price and the modern TCO approach is provided on the example of a batch of industrial bearings and reducers:

Analytical structure: TCO optimization methodology

To transition from purchasing at the lowest price to a TCO-oriented model UNITEC-D, UNITEC-D uses a three-level analytical structure based on standards ISO 55000 (Asset Management) and EN 16646 (Technical Maintenance in Asset Management):

1. Criticality Analysis of Equipment (Criticality Analysis): Classification of all components by the ABC/XYZ method. Critical components of category AX (high cost, high impact on production stoppage) require the presence of certified equivalents in stock or guaranteed supply time from Europe within 48-72 hours.
2. Life Cycle Costing (LCC): The TCO calculation formula includes: $TCO = P + S + M + O + D$, where $P$ is the purchase price, $S$ is the transportation and storage costs, $M$ is the installation and commissioning costs, $O$ is the operation and maintenance costs, $D$ is the cost of preventive and breakdown downtime.
3. Supplier Audit and Cross-Selection: Checking technical characteristics of parts for compliance with DSTU and European CE requirements, ensuring compatibility with existing Soviet and European production equipment.

Implementation Steps: A Practical Guide for the Enterprise

Implementation of the TCO optimization strategy requires a clear sequence of actions from the technical and commercial departments:

• Step 1. Conducting inventory and cataloging: Compiling a complete register of existing stock on the company's warehouses. Removing duplicates and obsolete positions that have not been used for more than 3 years.
• Step 2. Setting supplier selection criteria: Transition from tenders with a single criterion "who is cheaper" to tenders based on a combination of parameters: presence of ISO certificates, delivery times, warranty obligations, and technical support from the manufacturer's engineers.
• Step 3. Integration of spare parts catalog: Using verified sources for quick selection and cross-coding of components. In particular, engineers recommend referring to such resources as UNITEC-D E-Catalog for selecting certified European components with guaranteed technical parameters.
• Step 4. Logistics optimization: Organization of consolidated supplies from Germany to Ukraine in compliance with all customs regulations and safety standards (UkrSEPRO, CE).

Key Performance Indicators (KPI) and Metrics

For monitoring the success of implementing the TCO approach on the production, dashboards are configured with the following target values:

• Inventory Turnover Ratio (Inventory Turnover): The target value for MRO is 2.5–4 times per year (depending on the industry).
• Service Level / Fill Rate: Not less than 95% for critical category A inventory.
• Lead Time: Reduction of delivery time for imported spare parts to 5-10 working days for standard items.
• MTBF (Mean Time Between Failures): Increase of 20-30% due to the use of high-quality original components instead of cheap homemade alternatives.

MRO Support Tools and Technologies

Modern inventory management is impossible without digitization. The use of EAM (Enterprise Asset Management) and ERP systems allows automating the replenishment process at minimum stock levels (Reorder Point). UNITEC-D offers outsourcing supply services and integrated inventory management (Vendor Managed Inventory - VMI), where European experts take responsibility for monitoring criticality, timely replacement of lubricants, bearings, drives, and hydraulic components directly on the territory of the Ukrainian enterprise.

Common Errors and How to Avoid Them

Main pitfalls that purchasing managers on industrial enterprises fall into:

1. Focus exclusively on purchase price: Purchasing counterfeit or low-quality bearings and reducers leads to catastrophic losses from emergency stoppages.
2. Missing current catalog: Storage of obsolete drawings and nomenclature without reference to international standards ISO and DIN.
3. Ignoring storage conditions: Violation of temperature or humidity conditions during storage of rubber products, seals and electronics.
4. Overstocking (Overstocking): Purchasing excess units of rare equipment "just in case" instead of entering framework agreements with guaranteed supply terms.
5. Communication failure between production and supply: Purchase of components without agreement with the chief engineer regarding material compatibility and permissible loads.

Quick Results Checklist for the Procurement Manager (for this week)

Perform these 10 steps to reduce MRO costs within the next few days:

• [ ] Conduct an audit of the top-20 most expensive purchases from the previous quarter.
• [ ] Select critical positions (category A), the lack of which stops the production line.
• [ ] Check the availability of valid ISO and CE certificates for all recently purchased critical components.
• Check the inventory against the current workshop requirements.
• [ ] Remove obsolete items not used for more than 2 years from the active catalog.
• [ ] Set up automatic notifications in the ERP system for reaching the minimum stock level of critical components.
• [ ] Request alternative commercial offers with life cycle cost (LCC) calculation, not just unit price.
• Use UNITEC-D E-Catalog to check cross-references and search for certified European equivalents.
• [ ] Review the storage conditions for oils, belts and seals (control of humidity and temperature).
• [ ] Hold a short meeting with the chief engineer regarding the optimization of the preventive maintenance schedules (PMS).

Conclusion

Total Cost of Ownership (TCO) optimization in MRO procurement is not just an accounting procedure, but an engineering strategy to enhance the competitiveness of Ukrainian manufacturing. Transitioning from a focus on the lowest price to managing the life cycle of equipment allows reducing overall costs by 25-40% and guaranteeing the continuity of technological processes. For selecting reliable European components, ordering services of industrial outsourcing and integrated supply, visit UNITEC-D E-Catalog.

Bibliography

1. ISO 55000:2014. Asset management — Overview, principles and terminology.
2. EN 16646:2014. Maintenance within asset management — Maintenance framework.
3. Moubray, J. (1997). Reliability-Centered Maintenance (RCM II). Industrial Press.
4. Benchmarking of MRO costs in heavy industry in Europe and Eastern Europe, reports by UNITEC-D GmbH, Augsburg, 2023.