Total cost of ownership : a strategic sourcing intent

M.Ing. (Engineering Management)Abstract: Today’s competitive market climate call for organisations effectiveness in applying extra precautions on sourcing processes and decisions leading to assets acquisitions. Often than not, during sourcing activities, one of the key objectives is to find out all there is to know as far as the potential costs pertaining the acquisition in prospect is concerned. Beyond reengineering and enabling continuous improvement on supply chain processes to gain market competitiveness, organisations adopts the Total Cost of Ownership (TCO) philosophy designed to deliver a beyond price-based outlook upon sourcing decisions to ensure that all possible costs elements incurable is fully accounted and outlined accordingly. This study intends to evaluate and analyse the typical perceptions surrounding the widespread adoption of the TCO philosophy by organisations’ acquisitions key decision-makers. Further evaluating the overall implications of adopting the concept of TCO upon strategic sourcing objectives towards fulfilling the organisations key bottom-lines in a cost effective manner. It is often common practice for purchasing organisations to base their performance measures on savings achieved. Thus making saving the key performance indicator (KPI) of the strategic sourcing function without enabling possibilities to consider a price-based approach as an enabler of savings. Savings breeding from reduced face value or purchase price with little insight of the total value cost of the offering and without considering the Life Cycle Cost (LLC) inherent some limitations as far as the consideration of all the cost effects is concerned. In order to enhance the understanding of the TCO concept to its widest sense and its applicability within the strategic sourcing function. Major value drivers within the strategic sourcing space are critically analysed to depict their major influences to the value chain and to the widespread adoption of the TCO concept. The empirical findings points out the prevalence of quality and reliability of the suppliers’ offering and the capability to adequately meet the purchaser’s stipulated requirements. High dependency of the quality and reliability levels of the offered suppliers’ expertise, the overall costs of such relationships is sought to carry ripple effects to the value chain. As a result, in pursuit of understanding all possible cost impacts breeding from supplier selection, TCO enables quantification of major cost drivers and channels continuous improvement initiatives for effective strategic sourcing intent’s fulfilment. There also exists an outlying dominance of lower price preferences as a major contributor to the reduction of TCO of the purchasing function leaving a loophole for non-quantified cost impacts, which is detrimental to organisational effectiveness. Moreover, the reduction of the purchasing function TCO directly prevails from the adoption of the Life Cycle Cost (LCC) as it enables quantification of all costs associated with the acquisitions during its validity or existence. Co-value creation between suppliers and buyers displayed a resounding significance towards..