Supply Chain Management

The Total Cost of Ownership

• When making the outsourcing decision or comparing suppliers, many
firms make the fundamental mistake of focusing only on the quoted
price, ignoring the fact that many factors affect the total cost of using
a supplier
• The price charged by the supplier is only one of many factors that
affect the supply chain surplus
The Total Cost of Ownership (TCO)
• TCO includes all supply chain costs of sourcing a good or service from a
particular supplier and can be considered in three “buckets”—acquisition
costs, ownership costs, and post-ownership costs
• Ownership costs include all costs associated with the purchased part from
when it arrives from the supplier to when the finished product is sold to the
customer.
• These costs include inventory costs, warehousing costs, manufacturing or
conversion costs, production quality, costs, and production cycle time costs.
• Post-ownership costs include all costs incurred by the firm after the finished
product has reached the end customer. These costs include warranty costs,
environmental costs, product liability costs, and reputational costs
Acquisition Costs
• Acquisition costs include all costs associated with the purchase of
material from a supplier until it reaches the buyer and is ready for use
• These costs include the supplier price, supplier terms affecting
financing costs, taxes and duties, delivery costs, and incoming quality
costs
• Acquisition costs should also include the overhead of managing the
relationship and planning the purchases
Ownership costs
• Ownership costs include all costs associated with the purchased part
from when it arrives from the supplier to when the finished product is
sold to the customer
• These costs include inventory costs, warehousing costs,
manufacturing or conversion costs, production quality costs, and
production cycle time costs
Post-ownership costs
• Post-ownership costs include all costs incurred by the firm after the
finished product has reached the end customer
• These costs include warranty costs, environmental costs, product
liability costs, and reputational costs