Total Cost of Ownership Models: An Exploratory Study

Abstract

SUMMARYThis research examines organizational purchasing models focusing on the use of total cost of ownership (TCO) to value purchase opportunities. The research presents evidence that leading‐edge companies actually use such models. This exploratory study provides, for the first time, data on the nature, and use, of the cost drivers on which organizations base their TCO computations. The study suggests a generic model of total cost of ownership is not appropriate. However, the findings of this research suggest a TCO model based on a core set of cost drivers, along with an auxiliary set of cost drivers, is appropriate. The core cost drivers would be present in all, or most, TCO computations. Purchasing managers could use different, specific cost drivers from the auxiliary set to tailor the TCO computation for a particular purchase situation. The authors also suggest that a value‐based, multi‐firm, or supply chain, TCO computation model is needed. Such a TCO model should be similar to a single‐firm TCO model.