for both selection and evaluation in the same organization appears to be the exception rather than the rule. It further discusses the benefits of integrating supplier-selection and supplier-evaluation models. TCO selection/evaluation modelling in the same firm Only four case study organizations use a total cost of ownership approach for both supplier selection and supplier evaluation. The firms include all three firms that use TCO primarily for ongoing evaluation – TI, NT and Shell – and one firm that uses TCO primarily for selection – Motorola SPS. Shell and Motorola SPS use unique models, while NT and TI use standardized models. Motorola SPS uses a standard TCO model to track ongoing supplier performance and allocate volume among suppliers for one crucial raw material. However, they do not utilize that model in making supplier-selection decisions in the same buy class (raw materials) or other buy classes. This supplier- evaluation model is unique to that particular purchased item, while “standard” for that item over time. Thus, although Motorola SPS routinely uses TCO for supplier selection, TCO is used for evaluation only on an exceptional basis. Thus, this firm’s TCO modelling may not be indicative of that of other firms desiring to use TCO for both supplier selection and supplier evaluation. It is interesting to note that Motorola SPS originally implemented TCO for ongoing evaluation of the particular raw material mentioned above. It began with a value-based approach. When it expanded TCO for use in supplier selection, it followed most of the other selection-oriented case study firms in using a unique approach for each buy. It did not, however, switch over to a dollar-based approach like most of the other case study firms. While the
Total cost of ownership 19 number of cases reviewed is too limited to draw conclusions, the type of model with which a firm begins its TCO efforts may have implications when it expands TCO usage. Commonality between selection and evaluation models Both the selection model and the evaluation model provide excellent transaction cost data for reducing the supply base or for allocating volume among suppliers. Indeed, both selection-focused and evaluation-focused firms use their TCO models for this purpose. The evaluation-focused case study firms use TCO data for supplier selection in that they may use such data to allocate volume among suppliers or to reduce the supply base. However, this is quite different from using TCO data to analyse new suppliers. Both selection-focused and evaluation-focused TCO firms also use their TCO data for communicating priorities to suppliers and driving supplier improvements. They use TCO for process re-engineering at a more functional or micro-level than do the two firms which focus on process re-engineering as the driver of TCO. By using TCO at a micro level, they tend to focus on improvements in the purchasing area or at the supplier’s end, rather than on broader, corporate-wide issues. Both sets of firms use TCO data for negotiation purposes, which may be closely related to driving supplier improvements.
- Winter '19
- Total cost of ownership