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Supplier’s total cost of ownership evaluation: a data envelopment analysis approach

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  • Visani, Franco
  • Barbieri, Paolo
  • Di Lascio, F. Marta L.
  • Raffoni, Anna
  • Vigo, Daniele

Abstract

Supplier Total Cost of Ownership (TCO) is a widely-known approach for determining the overall cost generated by a supplier relationship, but its adoption is still limited. The complex calculations involved – and in particular the activity-based costing procedure for computing the cost of managing the relationship – pose a major obstacle to widespread TCO implementation. The purpose of this work is to formulate a Data Envelopment Analysis application (denoted ‘TCO-based DEA’) that can act as a proxy for TCO, and to test its ability to approximate the results of TCO with less effort. The study is based on the analysis of two categories of suppliers (74 in total) of a medium-sized Italian mechanical engineering company. The results show that TCO-based DEA is able to significantly approximate the outcomes of TCO, for both the efficiency indexes and rankings of suppliers, whilst requiring substantially less effort to perform the analysis. To our knowledge, this is the first study to develop a DEA-based tool for approximating TCO and to test it in a real-world setting. The research shows significant potential within the supply chain management field. In particular, TCO-based DEA can be used for analysing suppliers’ performance, rationalising and reducing the supplier base, assisting the negotiation process.

Suggested Citation

  • Visani, Franco & Barbieri, Paolo & Di Lascio, F. Marta L. & Raffoni, Anna & Vigo, Daniele, 2016. "Supplier’s total cost of ownership evaluation: a data envelopment analysis approach," Omega, Elsevier, vol. 61(C), pages 141-154.
    • Handle: RePEc:eee:jomega:v:61:y:2016:i:c:p:141-154
    DOI: 10.1016/j.omega.2015.08.001
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    3. Schöll, Michaela, 2017. "Three Essays on Sustainable Supply Chain Management – Towards Sustainable Supplier Selection and Sustainable Sourcing," EconStor Theses, ZBW - Leibniz Information Centre for Economics, number 172463, July.
    4. Dobos, Imre & Vörösmarty, Gyöngyi, 2019. "Inventory-related costs in green supplier selection problems with Data Envelopment Analysis (DEA)," International Journal of Production Economics, Elsevier, vol. 209(C), pages 374-380.
    5. Alikhani, Reza & Torabi, S. Ali & Altay, Nezih, 2019. "Strategic supplier selection under sustainability and risk criteria," International Journal of Production Economics, Elsevier, vol. 208(C), pages 69-82.
    6. Saccani, Nicola & Perona, Marco & Bacchetti, Andrea, 2017. "The total cost of ownership of durable consumer goods: A conceptual model and an empirical application," International Journal of Production Economics, Elsevier, vol. 183(PA), pages 1-13.
    7. Raut, Rakesh D. & Gardas, Bhaskar B. & Narwane, Vaibhav S. & Narkhede, Balkrishna E., 2019. "Improvement in the food losses in fruits and vegetable supply chain - a perspective of cold third-party logistics approach," Operations Research Perspectives, Elsevier, vol. 6(C).
    8. A. Azadeh & R. Siadatian & M. Rezaei-Malek & F. Rouhollah, 2017. "Optimization of supplier selection problem by combined customer trust and resilience engineering under uncertainty," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 8(2), pages 1553-1566, November.
    9. Shabani, Amir & Visani, Franco & Barbieri, Paolo & Dullaert, Wout & Vigo, Daniele, 2019. "Reliable estimation of suppliers’ total cost of ownership: An imprecise data envelopment analysis model with common weights," Omega, Elsevier, vol. 87(C), pages 57-70.

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