Total Cost of Ownership

Cost analysis of global sourcing in manufacturing companies (diss.)

Researcher:

P. Bremen

Financed by:

Partially financed by CTI No. 9864.1 PFES-ES
The Professorship’s own resources

Motivation:

The importance of global sourcing for manufacturing companies has strongly increased in recent years. Reduced range of vertical integration, globalization and increased cost pressure are three fundamental trends influencing global sourcing activities. Purchasing managers are challenged to select suppliers for specific, partly technologically complex goods. However, in manufacturing companies there is a lack of transparency concerning purchasing costs of goods and a lack of awareness about the implications of their decisions on the overall business success.

Research gap:

Total Cost of Ownership (TCO) is an existing approach for the holistic analysis of procurement costs. The concept aims at taking purchasing decisions not only based on the purchase price but including all costs related to the acquisition of a good. Nevertheless, only limited knowledge exists both in science and in industrial practice of additional costs that occur in the global context. In scientific literature published TCO models are inadequately operationalized and have only attracted little attention in industry, especially in small businesses.

Results:

In this thesis, a concept for the TCO analysis of global sourcing projects is developed, which is divided into three parts. First, the composition of the TCO associated with global sourcing is described on the basis of single cost elements. Subsequently, the prioritization of cost elements is presented based on a survey with Swiss industrial companies. In the third part, a method for company-specific TCO analysis is developed supporting decision makers in the selection of suppliers in the global environment. The method is based on generic cost types. Specific cost elements can be derived of the generic cost types by means of simple configuration composing holistic individual TCO models.

The specific requirements of global sourcing with regard to long delivery lead times, dynamic factors and supply chain risks and their implications on the profitability of sourcing projects have been thoroughly taken into account in the presented method. The practical application of the method in manufacturing companies is facilitated by the implementation of a Microsoft Excel based application. Additionally, a process model is developed describing the specific realization of the method for the development of company-specific TCO models in practice.The applicability and the practical use of the results are particularly demonstrated in the target-oriented case studies of this thesis. Company-specific TCO models are developed in three companies of various sizes from the medical industry, electronics and plant manufacturing. Furthermore, first insights of the application of the method in these companies are revealed.

Overall, this approach supports manufacturing companies in decision making in the context of global sourcing and accordingly contributes to the improvement of their competitiveness.