Total cost of ownership

TLDR

Total cost of ownership expands beyond purchase price to include other purchaser‑related costs, gaining importance as organizations seek better cost management. The study examines 11 firms’ total cost of ownership models, classifying them as dollar‑based or value‑based and by usage (supplier selection or evaluation), and illustrates examples of each. Analysis reveals a strong link between model type and usage, discusses barriers and benefits, and offers recommendations and future research directions.

Abstract

Total cost of ownership is a methodology and philosophy which looks beyond the price of a purchase to include many other purchaserelated costs. This approach has become increasingly important as organizations look for ways to better understand and manage their costs. Examines case studies of 11 firms which use total cost of ownership concepts in purchasing. Based on the case study data and the literature, barriers and benefits associated with the total cost of ownership approach are discussed. The total cost of ownership models used by the case study firms are classified by type as dollar‐based or value‐based, and an example of each is shown. The total cost of ownership models are then further classified by their primary usage: supplier selection or supplier evaluation. This cross classification reveals a strong relationship between model type and model usage. Concludes with a comparison of the models, recommendations for practitioners and a discussion of future research directions.