Effectively Selecting Suppliers Using Total Cost of Ownership

Abstract

SUMMARY In today's business world characterized by intense global competition, cost management is an important strategic weapon. External purchases of products and services generally account for more than 50 percent of total costs. Significant cost savings can be realized by effectively selecting suppliers and determining optimal order quantities. Existing cost management tools focus on rationalizing production and distribution activities and do not consider the purchasing function. In practice, simple, subjective, and incomplete approaches for supplier selection are often used. This article presents a rigorous decision support system using total cost of ownership information. The system uses a dynamic mathematical programming model that derives a purchasing strategy by minimizing the total costs, taking into account the relevant constraints. It allows the purchasing and supply manager to objectively evaluate alternative policies. A recent implementation of the system for two product groups at Cockerill Sambre shows potential savings of more than 10 percent compared to current practices.