Lecture 22 - Strategic management. TCO Flashcards
(!!!) Describe total cost of ownership / TCO in general & situations for use
General:
- CM technique
- Purchasing tool
- Philosophy
- Reveal purchase related costs
- Try to lower costs for production
- Aim to understand relevant cost of buying particular good or service from particular supplier
- More than just price
- Often presented as measure vs. manage cost
- From supplier to own use
- Compare supplier profitability
- Used static & dynamic
- Argument in discussions
- Complex: Determine most relevant & significant costs
- Costly if not considered
- Include both internal & external costs: Unlike traditional internal
- Purchase must be seen as a strategic activity to work
- No one fits all model
- Transaction cost analysis
- Value chain analysis: Makes TCO strategic
- Must adapt to buy-type & situation
- Despite low invoice price raw mat. can be expensive due to global purchasing
- Add strategic perspective to purchase process
- Eg. Shipment, tax, quality, time spend on purchase & terms of trade
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Approaches:
Monetary approach
- Assign cost to relevant purchase aspect
Value-based approach
- When unreliable in monetary units
- Use of non-financial measures
- Soft way to select supplier
- Eg. Risk
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Main reasons for use:
General:
- When important purchase
- Due to global purchases
- Rank from high to low
Reasons:
- High dollar value
- Repetitive buy
- Due to other decisions
- Difficult management
- Possible outsourcing or change in degree of outsourcing
Relevant companies:
- Low purchase power to supplier
- Purchase standard components but suppliers terms of delivery differs & may be negotiable
(!) Describe challenges & barriers to TCO and general critiques
Challenges & barriers:
Complexity:
- No easy data access
- Lack validity: Ref. IO
Organizational culture:
- Cost awareness > Price focus
- Involve more than purchasers
- Require convincing TCO- benefit
- Require user-friendliness
- Resistance if risk of eliminating jobs
- May require cultural change
Proper use & relevance:
- No one size fit all: Caution
- Product & supplier specific
- Time consuming
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Critique:
- Costing > CM framework
- Cost estimate for purchase
- Less focus on changing cost levels & cost structures of purchasing & use products supplied
(!) What is supported by TCO?
Supplier selection:
- Make/buy: Outsourcing
- Pre-award: Early supplier involvement
- Evaluate bids & requests for proposal
- Negotiate & challenge costs
- Allocate business
Communication:
- Train others
- Share ideas
- Market ideas internally
- Communicate with suppliers
Ongoing supplier management:
- Evaluate suppliers: Measure performance
- Recognize supplier improvement
- Provide consistent performance measures
- Support partnering
- Focus alliance improvement teams
- Ongoing evaluation: Allocation of business
Drive improvement:
- Focus on performance improvement
- Reduce costs
- Improve processes
- Justify equipment upgrades
- Concentrate resources on critical areas
Create understanding:
- Define crucial or major cost factors for commodity
- Quantify cost reductions
- Understand processes better
(?) Describe the closely aligned concepts to TCO
Life-cycle costing:
- Cost of use, maintenance & disposal of asset during lifetime
Zero based pricing:
- Focus on supplier pricing structure & cost of doing business
All-in-costs:
Cost-based supplier performance evaluation:
- More narrow than TCO
- Only external cost business
Cost-ratio method:
(!) How can TCO development, implementation & use overcome the barriers?
Create understanding of TCO:
- Training & education
- Provide resources, expertise & support
Develop right model:
- Improve/modify system
- Adapt TCO to situation & culture
- User friendliness
- Evolving over time
- Right approach before wide used
Get support from right people:
- Integrate in culture
- Seek input from users
- Get people with right skills
- Use initial success to sell idea
- TM support
- Move or retire resistent people
(!) Describe what is meant by relevant costs
Traditionally:
- CF change as direct consequence of certain decision
- Ref. Paul Riebel
- Eg. Investment
In strategic management:
- Structure change have long-term financial impact
- Less specific since time horizon change
- Eg. Cash flows changes due to market positioning, market change, market structure or consequence of competitors changing their cost structure or changed supply chain practices
(!) How can TCO be strategic?
- Value chain analysis
- Evaluate different outsourcing strategies incl. supplier choice
- Quality as strategic focus
(?) Describe costs beside price
Costs beside price:
- Order placement
- Research
- Qualification of supplier
- Transport
- Receiving
- Rejection
- Inspection
- Storage
- Disposal
Describe the levels of TCO analysis
