Total Cost of Ownership of the procurement process at Hydrogen Cyanide Company - Teaching note

Hydrogen Cyanide Company is a company that is experiencing increasing costs. Management is convinced that a lot of money is spent on the procurement of catalysts for the production of hydrogen cyanide and that important savings can be made here. Therefore they want to re-evaluate their supplier selection process. Rationalising the procurement process is an increasingly important issue for companies today as purchasing plays a strategic role in a firm's profitability and enhanced shareholder value. This significance of purchasing makes it relevant for firms to understand which purchasing approaches are effective and efficient, and can thus contribute to their overall market success and profitability by cutting hidden costs of wastage, rework, returns, etc. Insights into this topic are important because purchasing professionals in many companies still need to demonstrate the contribution they make to the firm. This case study offers students the opportunity to gain these important insights. Students are challenged to compare traditional procurement practices, such as the weighted point method, with the more recently developed total cost of ownership method, which is based on activity-based costing