Title: Differential method for TCO modelling: an analysis and tutorial

Authors: John D. Hanson

Addresses: Supply Chain Management Institute, University of San Diego, 5998 Alcala Park, San Diego, CA 92110-2492, USA

Abstract: Cost models based on total cost of ownership (TCO) or life cycle cost (LCC) are widely advocated for procurement decisions, particularly those involving source selection or to make outsourcing decisions. Unfortunately, the standard treatments of these topics in textbooks and journal articles provide little guidance on how to actually set up and perform the analyses, in part because they tend to overlook the differential nature of these concepts. This article demonstrates that a TCO is not a property of a product or service but of a decision and thus lends itself to differential analysis. A template structure is proposed to assist in performing the analysis and presenting the results. The key benefits of this structure are: a) more rigorously analysed decisions; b) a communication tool by which the impact of procurement decisions can be communicated to the larger organisation and integrated into strategic planning discussions.

Keywords: total cost of ownership; TCO; life cycle costing; LCC; cost modelling; procurement decisions; communications; strategic planning.

DOI: 10.1504/IJPM.2011.043003

International Journal of Procurement Management, 2011 Vol.4 No.6, pp.627 - 641

Published online: 31 Jan 2015 *

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