Total Cost of Ownership (TCO)

According to the book Strategic Supply Management (Cousins, P., Lamming, R., Lawson, B. and
Squire, B., 2008, chapter 12), total cost of ownership (TCO) can be defined as .. a big picture
perspective, considering costs beyond simply price. Other cost factors are critical, including costs
related to quality, delivery services, ordering, reception, inception and transportation.. By looking
the finance analysis from The Fresh Connection, beside direct purchasing costs (total amount of
913. 209) TCO takes stock costs (399. 175), inbound (manpower costs, 86. 434) from handling
costs, inbound (ordering costs, 102.522) from administration costs and transportation costs (145.
188) into account.

The purchase value (without transportation) for the PET bottles is 173. 839. We have been asked
to calculate the percentage of every upon mentioned cost in compare to the purchasing value of PET
bottles. Since transportation is one of these elements of TCO, we calculated the purchasing value
for every product without it (so its excluded from all below given purchasing values) and we came
into result 768. 021. After that it was easy to divide PETs purchasing value 173. 839 from the
complete purchasing value and we came to result 22,63 %. It was only possible to make comparison
between transportation costs and PETs purchasing value, since on the website of The Fresh
Connection transportation costs were the only ones given separately from product to product. We
calculated this by dividing PETs transportation costs (97. 497) from its complete purchasing value
(173. 839), which results 56,08 %. The other costs (stock costs, manpower costs and ordering
costs) we calculated separately by dividing their purchasing value (stock: 399. 175 , manpower:
86. 434 and order: 102. 522) from the total purchasing value (768. 021 exc. transportation
costs). The results are stock costs 51,97 % , manpower costs 11,25% and ordering costs 13,35%.

ART OF COST SUGGESTION EFFECTS

stock costs i.g. reduce order size increased ordering costs (more
smaller orders needed)

ordering costs i.g. enlarge ordering size reduce order interval but
meanwhile increase stock
costs, risk costs and manpower
costs

manpower costs i.g. investment of a machine, changes in time line requires

changes in order size or time changes in the whole
line production system

transportation costs i.g. changes in order size and reduce order interval and
interval increase order size -> again can
cause increased stock costs

Table to represent effects of decreasing the costs.

If these suggestions of decreasing the costs want to be fulfilled, changes have to been made also at
the supplier policy. Possibilities are, for example, to make more flexible contract terms or use less
suppliers.

Based on our given information from Kraljic Matrix, we can notice that all products belong to
non-routine quadrant. Because of that, its impossible to make any comparison between their
costs. Also as noticed above, all costs of products havent been given separately for all cost
categories, which results to difficulties at calculating. We can assume that there arent
differences between the categories. If there were, it would mean measurements for supplier
policy (e.g. bidding the suppliers).

Because of the lack of information, it is only possible to speak for differences in transportation
costs. As noticed, when ordering PET bottles you pay 35% of the total price only for transportation.
One possibility is to bid different suppliers and find the one with best price-quality-relationship.

There are many different benefits which adapting the TCO gives. Since different costs are
categorized and all hidden costs uncovered, it is easier to find the detailed information from
particular costs, i.g. compare different products and their costs with each other, observe the
development of costs, separate profitable products from non-profitable and makes prioritizing and
selection between suppliers easier. Product life cycle is also noticed, which is also an important
element, especially analyzing investments. It is very difficult to pick only one main benefit.