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Background
Total cost of ownership (TCO) is a purchasing tool and philosophy which is aimed at understanding the true cost of buying a particular good or service from a particular supplier. While there have been references to the TCO approach in the literature for some time[l,2], many firms, particularly in the USA, have been slow to adopt TCO.
Total cost of ownership is a complex approach which requires that the buying firm determines which costs it considers most important or significant in the acquisition, possession, use and subsequent disposition of a good or service. In addition to the price paid for the item, TCO may include such elements as order placement, research and qualification of suppliers, transportation, receiving, inspection, rejection, replacement, downtime caused by failure, disposal costs and so on. TCO may be applied to any type of purchase. The cost factors considered may be unique by item or type of purchase[3].
Based on case studies of 11 organizations that are actively using formalized TCO approaches in purchasing, this article explores the answers to the following questions:
* What are the theoretical underpinnings of TCO analysis?
* What are the benefits sought in TCO implementation and what are the barriers which slow down TCO adoption?
* What are the potential uses of TCO models?
* Is there a relationship between the type of TCO model selected and its primary use?
* Are there organizations which use their TCO model for more than one such primary use? Do certain types of TCO model better lend themselves to multiple uses?
* What are the implications of these findings for TCO model development and modification?
Before proceeding to the case studies, TCO is compared with other supplier selection and evaluation systems.
TCO versus other methods of supplier evaluation and selection
Traditional approaches to supplier selection and ongoing evaluation include selecting and retaining a supplier based on price alone, or based primarily on price, or qualitatively evaluating the supplier's performance using categorical 5 or weighted point/matrix approaches[4,5]. While the latter approaches are - preferred to a "price only" focus, they tend to de-emphasize the costs associated with all aspects of a supplier's performance, and generally disregard internal costs. Examination of such costs is a strength of the TCO approach.