How to Calculate the Total Cost of Ownership (TCO) for Packaging Lines and Machinery

Cost calculation is an important early step to determining potential return on investment (ROI)^{Return on investment (ROI) is the ratio of the profit of an investment to the cost of that investment.}. When investing in packaging machinery, however, calculating the initial purchase price alone is not enough. To properly inform your investment decisions, it’s important to understand the total cost of ownership (TCO). In this post, we’ll define TCO for packaging equipment, provide a list of factors you should consider during cost calculation, and share tips for how you can keep costs low.

What is TCO and why does it matter?

Total cost of ownership (TCO) refers to the long-term costs associated with owning and maintaining a packaging line or machine throughout its entire lifecycle. In addition to your initial capital investment, you will incur costs associated with the purchasing process, plant operations, machine maintenance, technical support, and more. By accounting for all these costs, you can accurately calculate the total cost of owning the equipment and subsequently, better predict your ROI.

Common Packaging Equipment Cost Factors

When you’re purchasing new packaging equipment, there are several project-specific factors to consider. Maybe you’re relaunching your product with a more sustainable package, and you need to account for a longer testing period to ensure the equipment is compatible with the package. Or maybe you're opening a new production plant and you need to assess your requirements for on-site utilities. While every project comes with its own unique cost factors, most costs can be simplified into three categories – capital costs, operational costs, and maintenance costs. We'll summarize each category below, but for a more comprehensive explanation download the free TCO calculation guide. 

Download the Guide

What are capital costs?

Capital costs are the initial expenses that you will incur upfront with the purchase of your packaging equipment. These costs are typically one-time expenses that can be calculated by considering factors such as:

• Equipment design
• Permits, certifications, acceptance testing
• Shipping and installation
• Equipment validation^{Equipment validation encompasses the final tasks that are required for an original equipment manufacturer (OEM) to hand off newly purchased equipment to a consumer packaged goods (CPG) company. Equipment validation tasks include, for example, ensuring ensuring installed equipment meets quality and throughput requirements.}

2 Ways to Lower Capital Costs

Take a consultative approach during contract negotiations

Im­posing too many strict demands (i.e., tight time constraints, total control over OEM^{In the packaging industry, an original equipment manufacturer (OEM) is the company which manufactures the machinery used to facilitate the packaging process.} selection, etc.) will drive up the purchase price. On the other hand, taking on responsibility in-house for tasks you’re not set up to handle can also put the project at risk. The best way to navigate this conundrum is finding your ideal balance between cost and risk. This requires looking inward at the depth and strengths of your in-house resources and asking yourself a series of questions.

• Who should be responsible for each task?
• What risks are associated with owning those tasks in-house?
• What assurances are granted by contracting the integrator to do them?

These questions will help you make cost-effective decisions during contract negotiations.

Maximize SKU variability with flexible packaging solutions

Sometimes, considering equipment speed and capability alone is not enough. It’s also important to evaluate the need to interchange between these factors, especially if you are a co-packer^{A co-packer (or contract packager) is a company that packages and/or labels goods for another company or brand owner.}. Investing in a flexible packaging solution that is easily configurable and designed for quick changeovers^{A changeover is the transition time from running one item (or SKU) in a manufacturing process to another.  Some machines change over using the “recipe” system, where the parameters for different products are stored and then drawn into the machine parameter database. This allows a packaging machine to run different weights, sizes, and volumes with precision.} will allow you to produce multiple SKUs as quickly as possible on the same machine. By evaluating the need for flexibility during the equipment design phase, you’ll reduce your need for future capital investments.

What are operational costs?

Operational costs are the ongoing expenses that you will incur to run your packaging equipment. These costs recur throughout the life of the equipment and are calculated by considering factors including:

• Staff training
• Automation and labor requirements
• Utilities

2 Ways to Lower Operational Costs

Keep superb training and troubleshooting resources

Your packaging equipment supplier should provide you with an operator manual and step-by-step training documents for future employee onboarding. This will mitigate some of the recurring costs of training. Some OEMs also include operator training resources via the human-machine interface (HMI)^{A human-machine interface (HMI) is the dashboard through which an operator interacts with packaging systems or equipment. Modern HMIs can offer operator training resources, provide preventative maintenance reminders, assist in troubleshooting machine malfunctions, and much more.}. This can include video tutorials and on-demand training guides to make setup and operations simple. Including these training resources directly within your packaging solution allows your operators to always have access to the most up-to-date training and troubleshooting resources available.

Create efficient changeovers with packaging automation

Whether you’re a private label manufacturer or a co-packer, maximizing your production time is a priority. As you evaluate machines for your packaging line, look for options that will automate processes that would otherwise require a hefty investment in manual change­overs. Automated changeovers are popular because they’re easy and cost-efficient. Once you program the recipe, there isn’t much more to the changeover than selecting the right recipe – the automated system does the rest of the changeover for you, reducing operator overhead and the opportunity for errors to occur.

What are maintenance and support costs?

Maintenance and support costs are the ongoing expenses associated with keeping machinery in working order, troubleshooting, and resolving unexpected disruptions. These costs can be trickier to manage than capital and operational costs because it’s not always clear when maintenance and support will be required. However, you can mitigate unexpected costs through careful consideration of:

• Documentation
• Parts Lists (Spare and Wear)
• Aftermarket Support

2 Ways to Lower Maintenance and Support Costs

Stick to the maintenance schedule

Abiding by the supplier-recommended maintenance schedule is the easiest (but most important) way to keep your maintenance costs low. Completing tasks such as cleaning, lubricating, and replacing worn out parts within the recommended time frame results in fewer breakdowns, less downtime and lower emergency maintenance costs, as well as increased safety for your machine operators.

Include a parts and service agreement in your contract

Parts and service agreements can reduce your maintenance costs by giving you fast access to wear parts and ensuring OEM availability when you need emergency technical support. By working with your supplier to create a package that supports your long-term maintenance needs and your overall investment and production strategy, you can better plan for the costs ahead and mitigate any unplanned expenses.

The Comprehensive Guide to Calculating Packaging Equipment TCO

Did you find this content useful? If so, check out our comprehensive guide to calculating packaging equipment TCO. It provides breakdowns for each of the cost factors mentioned above, additional tips for keeping costs low, and a list of proven packaging solutions to consider for your next project.

Download the Guide