TCO Calculator: Cost Optimizations for Cloud-based SCM
Brian Hoey - January 14, 2021
By switching from on-prem to cloud-based software for supply chain management solutions, OEMs and other manufacturers stand to save more than 30% of the internal IT costs that come from expensive in-house management and the presence of overlapping or redundant systems. This might seem like a bold claim—but it’s backed up by flexis experience working with complex enterprise IT environments. Why? Because as technology ecosystems across the supply chain become more complex, the potential for TCO reductions becomes more and more significant.
It’s a commonly trotted out refrain that, when it comes to investing in cloud technology and infrastructure, the metric that you should care about is TCO, or total cost of ownership. But what does that mean in practice—particularly when we’re talking about something like a transportation management solution (TMS) or other supply chain software?
Another way to look at the question is to ask yourself how your overall operational costs will be impacted by a particular deployment over the course of that software’s lifecycle. What upfront and recurring costs will you have to deal with? What cost optimizations will the technology power? How much will you spend on maintenance? In this post, we’ll help you get a handle on those questions and more when it comes to cloud-based supply chain management.
How to Calculate TCO
First things first: how do you calculate TCO? For on-prem software deployments, it’s fairly straightforward (though there are plenty of hidden costs that businesses sometimes forget to account for):
- Hardware (e.g. on-premise servers, server racks, load balancers, replacement parts, etc.)
- Space (i.e. capital commitments for the square footage of your server rooms)
- Software licenses
- Electric costs
- Cooling costs
- Hardware maintenance
- IT support staff
Like we said: pretty straightforward. But, it’s important to note that most servers have a useful life of only 3-5 years, which means that you have to factor in the cost of replacements if you plan to keep using the same software solution after that amount of time. Likewise, you’ll want to think about whether you’ll ever need to scale your computing capacity up or down. Scale up, and you’ll not only need more servers, but more physical space in which to put them, which might quickly become expensive depending on what your physical space is like.
Since most of companies that move to the cloud are doing so from on-prem deployments (though migrations from one cloud-hosted solution to another or one cloud provider to another are becoming increasingly common), we’ll consider other operational costs (i.e. the costs that cloud technology has the power to reduce) outside what’s listed above to be your cost baseline; thus, cost optimizations usually don’t factor into your TCO calculation at this stage. That said, if you’re considering moving from one on-prem deployment to another, you can and should think about how the new solution will impact costs outside the realm of IT spending. For instance, if the new solution is designed to create a leaner supply chain with reduced capital commitments, your best estimates for savings can factor in your cost analysis.
Real Costs of Cloud vs. On-Prem Supply Chain Software
Of course, when it comes to calculating TCO for the cloud, you don’t have to worry about all of the hardware and space costs that we listed above. For a SaaS solution, you just have to pay for software subscriptions on a monthly basis. Or, at least, that’s the usual line—in reality, it’s a little more complex than that.
Even if you’re just adopting a SaaS solution, there will be migration costs as you move data and workloads from existing servers into new IT environments. There might even be consulting costs involved if it’s a particularly complex ecosystem. Then, if you’re talking about something more like a full-scale cloud migration of your entire IT infrastructure, not only do you have to factor in significant labor costs, but also likely a higher monthly Azure or AWS bill during the early days when you’re still right-sizing your deployment. Plus, you’ll probably have to account for labor costs in the form of added IT support for users dealing with the new infrastructure for the first time.
Cloud SCM Cost Levers
The hidden costs of cloud solutions can impact your TCO—but the cloud also is more cost effective than on-prem technology in the vast majority of cases. Why? Because its agile, distributed nature has the power to generate cost optimizations up and down the value chain. For instance:
- Improved capacity utilization/performance: One of the first and most obvious impacts of a cloud deployment—be it a SaaS solution that connects multiple touchpoints or a full IaaS (infrastructure as a service) migration—is the creation of a hyper-visible shared IT space. This, in turn, improves data velocity and ultimately makes it possible for planners to gain insights into their production capacity, for instance, that help reduce waste and inefficiency fairly immediately. The result is improved capacity utilization and improved supply performance as a result of that visibility.
- Reduced unit costs: The improved capacity utilization we sketched out above will, in turn, lead to better throughput times—meaning that your unit costs for production can be cut down substantially.
- Faster technology deployment: Because the cloud is distributed by its very nature, distributed deployments (i.e. across multiple plants or other network elements) can be carried out much more quickly and easily than with on-prem technology. For networks that have a large number of elements, this can save tons of time and labor costs.
- Easier scalability: Not only can you scale to multiple plants more quickly with a cloud deployment, you can also scale your data usage up or down more easily. There’s no need to ramp up new servers to meet increased capacity—which means that you don't need to pay for increased square footage. In this way, you’re able to handle seasonality in the most cost effective possible way (i.e. only paying for the computing power you need, when you need it.)
- Increased analytics power (network/process optimization): Simply put, cloud technology makes it much easier to integrate AI, machine learning, advanced analytics, and more up and down your process chain. This, in turn, gives you the chance to optimize planning and network design. This can reduce the need for special logistics trips, increase productivity, and power dynamic capacity adjustments—all of which save you money in the short and long term.
Naturally, some of the cost levers above will be easier to factor into your calculations than others. But the fact remains: if costs are a major consideration in your supply chain, cloud-based technology deserves strong consideration.