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The Adoption of Total Cost of Ownership for Sourcing Decisions: A Structural Equation Analysis, Accounting, Organizations and Society

Abstract

This study investigates the adoption of total cost of ownership (TCO) analysis to improve sourcing decisions. TCO can be seen as an application of activity based costing (ABC) that quantifies the costs that are involved in acquiring and using purchased goods or services. TCO supports purchasing decision-makers in focusing on total value received and not simply price, and it extends ABC concepts and tools to an inter-organizational context. Based on ABC-adoption literature and focus-group discussions with senior purchasing executives, a model is developed to explain relationships among eight constructs hypothesized to explain TCO adoption: competitive pressure in customer markets, strategic purchasing orientation, top management support, functional management commitment, value analysis experience, adequacy of TCO information, success of TCO initiatives, and use of TCO-based review and reward systems. We test this model using multi-sample structural equation modeling on survey data collected from purchasing managers and plant maintenance managers. We find support for most of our hypotheses and, further, that the posited relationships are largely invariant across purchasing manager and plant maintenance manager perspectives.

Type

Article

Author(s)

Marc Wouters, James Anderson, Finn Wynstra

Date Published

2005

Citations

Wouters, Marc, James Anderson, and Finn Wynstra. 2005. The Adoption of Total Cost of Ownership for Sourcing Decisions: A Structural Equation Analysis. Accounting, Organizations and Society. 30(2): 167-191.

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