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See discussions, stats, and author profiles for this publication at: Total Cost of Ownership: An Analysis Approach for Purchasing Article in International Journal of Physical Distribution & Logistics Management · October 1995 DOI: 10.1108/09600039510099928 CITATIONS 272 READS 1,642 1 author: Some of the authors of this publication are also working on these related projects: The Future of Supply Chain Finance (SCF) - Financial Flows & Sustainability View project Lisa M. Ellram Miami University 134 PUBLICATIONS 11,898 CITATIONS SEE PROFILE All content following this page was uploaded by Lisa M. Ellram on 30 December 2016. The user has requested enhancement of the downloaded file.
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IJPDLM 25,8 4 Total cost of ownership An analysis approach for purchasing Lisa M. Ellram Arizona State University, Tempe, Arizona 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[1,2], 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? Received June 1994 Revised January 1995 Revised May 1995 The author would like to thank the Center for Advanced Purchasing Studies and the Arizona State University College of Business, Alumni Association and Council of 100 for their support in this research. International Journal of Physical Distribution & Logistics Management, Vol. 25 No. 8, 1995, pp. 4-23. © MCB University Press, 0960-0035
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Total cost of ownership 5 Before proceeding to the case studies, TCO is compared with other supplier selection and evaluation systems.
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