TCO ABC activity based costing

TCO ABC activity based costing

Vlerick Leuven Gent Working Paper Series 2004/08

CONSTRUCTING A TOTAL COST OF OWNERSHIP

SUPPLIER SELECTION METHODOLOGY BASED

ON ACTIVITY BASED COSTING

AND MATHEMATICAL PROGRAMMING

Z. DEGRAEVE

EVA LABRO

FILIP ROODHOOFT

Filip.Roodhooft@vlerick.be

TCO ABC activity based costing

CONSTRUCTING A TOTAL COST OF OWNERSHIP

SUPPLIER SELECTION METHODOLOGY BASED

ON ACTIVITY BASED COSTING

AND MATHEMATICAL PROGRAMMING

Z. DEGRAEVE

London Business School

EVA LABRO1

London School of Economics

FILIP ROODHOOFT

Vlerick Leuven Gent Management School,

KU Leuven

running head: Total Cost of Ownership for supplier selection

Contact:

Filip Roodhooft

Vlerick Leuven Gent Management School

Tel: +32 16 32 36 36

Fax: +32 16 32 85 81

Email: Filip.Roodhooft@vlerick.be1 Corresponding author

TCO ABC activity based costing

ABSTRACT

In this paper we elaborate on a Total Cost of Ownership supplier selection methodology thatwe have constructed using real life case studies of three different industrial componentsgroups in a firm. These case studies are presented in this article. Analysing the value chain ofthe firm, data on the costs generated by the purchasing policy and on supplier performance arecollected using Activity Based Costing (ABC). Since a spreadsheet cannot encompass allthese costs, let alone optimise the supplier selection and inventory management policy, amathematical programming model is used. For a specific component group the combination ofsuppliers is selected that minimises the Total Cost of Ownership. TCO takes into account allcosts that the purchase and the subsequent use of a component entail in the entire value chainof the company. The TCO approach goes beyond minimising purchase price and studies allcosts that occur during the entire life cycle of the item in the organisation. Possible savings ofbetween 6 and 14% of the total cost of ownership of the current purchasing policy areobtained for the three cases.

Keywords: Activity Based Costing, mathematical programming, supplier selection,purchasing

TCO ABC activity based costing

INTRODUCTION

Purchasing determines an important part of the competitive position of most firms. Itaccounts for 60% to 70% of total expenditures in manufacturing (Herberling, 1993), leads tolong term relationships and influences the activities in the complete value chain of the firm.However, in both the operations management and operations research literature a lot moreeffort has been put into obtaining cost reductions in further stages of the value chain,especially in increasing production efficiency. Although purchasing probably does not receivethe attention it deserves in Western academic literature, it is a field where large costreductions can be obtained, as is shown by the Japanese who have traditionally paid moreattention to this field. The cases reported on here, however, are in a traditional Western firm.The management accounting literature has recently picked up this inter-firm setting as aninteresting area to study. Seal et al. (1997) present evidence on the role of accounting indeveloping a strategic supply partnership in an action research study. Ittner et al. (1999) lookat the effect supplier selection has on company performance and the intervening variables inthis relationship. Cooper and Slagmulder (1999) present a book with case studies of costmanagement in the supply chain. Van der Meer-Kooistra and Vosselman (2000) discussmanagement control issues in interfirm relationships. Baiman and Rajan (2002) provide anoverview of the incentive issues in inter-firm relationships identified by the incompletecontracting literature. Dekker (2003) looks at the provision of information to coordinate andoptimise the supply chain in a case study.

Within the purchasing framework, decisions that have to be taken include supplierselection and determination of order quantities to be placed with these selected suppliersthrough time. Supplier selection decisions have a multiple objective character. At least 23criteria for this selection problem have been identified in the literature (Dickson, 1966;Weber, Current and Benton, 1991). These include amongst others: net price, quality, delivery,supplier performance history, capacity, communication systems, service, geographicallocation. The problem is how to select suppliers that perform satisfactorily on the desireddimensions.

Published vendor selection models formulate answers to this multiple objectiveproblem. Some authors propose linear weighting models in which suppliers are rated onseveral criteria and in which these ratings are combined into a single score (e.g. Gregory,1986; Nydick and Hill, 1992; Willis et al., 1993). These rating models are very subjective andoften very sensitive to different rating scales, weights and/or ratings by different people. Total

TCO ABC activity based costing

cost approaches ( e.g. Monckza and Trecha, 1988; Smytka and Clemens, 1993) attempt toquantify all costs related to the selection of a vendor in monetary units but often fail to includethe more qualitative criteria. Mathematical programming models (e.g. Chaudhry et al., 1993;Current and Weber, 1994; Sadrian and Yoon, 1994) often consider only the more quantitativecriteria.

In this paper, we combine a total cost approach with mathematical programmingbecause the dimensions of the problem cannot be handled using a simple spreadsheet. Wepropose a Management Information System (MIS) that simultaneously treats the supplierselection and the inventory management decision for multiple components over several timeperiods in a mathematical programming model. This MIS is based on Total Cost ofOwnership (TCO) and Activity Based Costing (ABC) information (Degrae …… 此处隐藏：36624字，全部文档内容请下载后查看。喜欢就下载吧 ……