Positive effects on the relationship with the supplier The purchasing has a clear view on the cost structure of a product/service of a supplier. Firstly, these data can help the purchaser for negotiations with the aim of reducing costs, as it was done by Degraeve and others (2004) for the negotiations for the purchase of a service with different airlines (resulting with the entire TCO analysis in 19.5% savings compared to the ad hoc policy). In return, this can be beneficial for the supplier, as he knows exactly which performance areas to improve (Ellram, 1993a, 1994a, 1994b). Indeed, Carr and Ittner (1992), and Ellram (1993a) state that TCO data help to improve and evaluate the supplier performance. This supports the firm’s overall continuous improvement effort, by creating savings opportunities and quality enhancement (Ellram, 1993a). Then, the supplier can also better justify some higher initial costs because of a high quality, resulting in lower maintenance costs. Consequently, this transparency of data is beneficial both for the purchasing and the suppliers, which results in an enhanced communication and an improved relationship (Ellram, 1993a, 1994a). Improved communication internally and mutual recognition between departments
The TCO analysis has a double positive effect internally between the different departments of an organisation. On the one hand, the purchasing organisation is acknowledged within the company as an entity creating value since savings can be quantified. TCO approaches enable positive impacts on the purchasing’s role in decision making, as their value is recognised among the company (Ellram, 1994a). Carr and Ittner (1992) think that TCO systems enhance the performance of a purchasing department. On the other hand, purchasing does work alone but in a team with the inputs of all the other functional departments involved in the project, such as "planning, finance, accounting, engineering, quality and operations" (Ellram, 1993a). Purchasing acknowledges the help and the value added by the members of this team, and takes their concerns/requests into account. As a result, the use of the TCO is way to create and pursue a proactive and collaborative relationship between the departments of an organisation. Challenges concerning the TCO implementation In her case study analysing the use of TCO among American companies, Ellram (1994a) lists the challenges, difficulties concerning the implementation and usage of TCO: relevance of TCO models, data availability, complexity, and corporate culture. She emphasises that effective use of TCO is not simple, and that no standard implementation procedure exists. Relevance of TCO models As stated above in 1.2.2, the use of TCO is not appropriate for all purchases. Indeed, the TCO approach must be used only when the benefits of this tool exceed the efforts for implementation.
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