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First Thoughts


By Dan Gilmore


Feb. 16, 2006

Supply Chain Software TCO  

As many of you know, last year we produced a report on ERP versus “best-of-breed” software. That debate continues in the market and within individual companies, and we encourage anyone interested in this subject to download one or both reports to see our survey results and recommendations. You will find some good stuff in these reports.

During our research, a number of things became clear. One of them was that very few companies were really doing a great job of estimating the total cost of ownership of potential software solutions over some reasonable time horizon (3-7 years).

I’m not sure why that is. Maybe it’s just hard. Maybe companies assume that after the upfront costs that the TCO across solutions is about the same.

I believe TCO is a concept that originated with the analyst firm Gartner, at least in the software arena. If they didn’t invent it, they at least significantly raised industry awareness of the principles in a series of research notes in the mid-1990s.

TCO is important for a number of reasons. First, it’s necessary to well understand the costs over time to compare against the benefits over the same time-frame. Like many things in life, the upfront costs are often dwarfed by the long-term operating costs, and too many companies focus only on the upfront portion.

Second, the TCO can vary substantially across solution vendor alternatives. Just for example, I’ve heard both ERP and best-of-breed supply chain software vendors passionately claim they have lower TCO for their solutions than the other side.

I don’t know who is right (more later), but I do know it’s important to look at these costs in detail. Even if you are just considering best-of-breed for a given solution, the TCO can be very different depending on the solution, its technology, upgrade policies, maintenance and support programs, third-party software used, etc.

To help in that effort, SCDigest technology editor Mark Fralick and I (with formatting help from staffer Connie Venema) have put together a TCO model in spreadsheet form for Warehouse Management Systems (WMS TCO), complimentary for SCDigest  subscribers. Download here. We chose WMS because in many respects warehouse management systems are the most complex TCO’s to calculate among individual supply chain applications, given there’s often a lot of different hardware involved (e.g., RF devices, voice, printers, etc.), many “add-on” modules being offered beyond the core WMS, different vendor approaches to packaging software and services, and in many cases a lot of modifications to the base package.

We’re confident this tool – which combines up front costs with the present value of on-going costs to calculate a total present value of the TCO of a given WMS solution, can be a big help to anyone considering warehouse management software. We’ll be producing TCO calculators in other application areas soon.

The model is detailed, because we think that’s the right approach, but you can take some short cuts. We also try to call out areas where we think there won’t be much difference between vendors (but which are nonetheless important for calculating project ROI) and where there can be important differences in costs between alternatives.

We’d welcome any suggestions for improvement. Feel free to email us with your suggestions, compliments or critiques.

Like many things, TCO calculation can be easily manipulated, depending on how you handle assumptions. As we noted in the ERP versus best-of-breeds reports, when calculating TCO “critical assumptions will have to be made, often based not only on facts but also in part on educated guess work. SCDigest believes it is critical to have all the assumptions about costs and returns clearly stated and understood by the project team and upper management.”

We also recommend sharing these projections about TCO (and ROI) with vendor candidates. Why? Both to test assumptions and estimates, and also because each vendor may have ideas about how to lower costs. They may not be that anxious to do so unless you ask with this kind of model in hand.

We hope you find it helpful, and would welcome your thoughts on total cost of ownership calculation generally, and our new tool specifically. Download here.

Is TCO an important factor to consider for WMS and other supply chain software? Why or why not? Do you think most companies do a good job of considering this?


Let us know your thoughts.


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