Total Cost of Ownership - Essay Example

Total Cost of Ownership exam question Question a Introduction In most of the companies the cost incurred in raw materials and components comprises the maximum percentage of the overall operation cost. It accounts to around 80% of the total operation cost of the company. This cost is maximum for the big and large firms where the raw materials are been bought at huge number. As per the Just-In-Time and Total Quality Management the company needs to have good criteria for selecting the right te4chquie and source for procuring the raw materials. Thus the selection of suppliers for procuring the raw material is a very important case for every company to see that they incur the minimum cost in procuring the materials. In this essay it can be seen how the concept of total cost ownership does help the company in selecting the suppliers in the best possible way and help them in reducing their operations cost to the minimum amount. Discussion The concept of Total Cost ownership is one of the fast growing concepts in today’s business environment. Based on this concept the entire cost of the procurement is been determined rather than calculating only the initial purchase price of the raw materials. The term Total cost ownership is quite new in the business environment but it is quite similar to the notions of life cycle costs and other criteria’s which are been used to properly evaluate the business operations (Spiller, Reinecke, Ungerman and Teixeira, 2013). This particular concept aims at understanding the true cost that is incurred in a purchase process when a particular material is been bought from a specific vendor and this concept also indicates all the types of costs that are involved in the entire purchase process. This includes the pre-transaction cost which is incurred from the time of requisition to the time of placing the order, the transaction costs which is incurred from the order placement to the receipt and the post transaction flow of cost which refers to the cost incurred from the receipt to the disposal of the materials (Ellram and Siferd, 1993). In case of the pre-transaction cost the cost associated in investigating and determining the sourcing strategies or addition of new vendors to the IT system is been taken care, in case of transaction of different costs such as the delivery cost, purchase cost and also the quality inspection cost can be seen and in post-transaction cost the reworks been done, the cost incurred at the time of warranty and fallouts are been considered. The concept of total cost ownership does help the company to make the selection of the suppliers in a good way and also provides a better understanding of the overall cost that the company incurs in its procurement process and the overall structure of the costing is also understood. Present Value Many different methods are been used by the organizations to understand the relevant costs that is been incurred in the purchase process. Some organizations look to analyse this by identifying the difference between the direct cost and the indirect cost. It is important to consider the present value of the amount as the value of a single dollar is much more than that of the value of dollar a year ago from the same time. The interest rate for the firm is the marginal cost of the capital with the level of risk that is related to the procurement process. Based on the present value of the dollar the suppliers do set the price of the products and also the price of other process that are involved in the entire purchase process is been set. The company needs to consider the entire process and also the present value of the currency to examine the exact amount that is incurred in the entire procurement process to make the selection of the suppliers (Ellram, 1995). Cost Comparison The concept of total cost of ownership helps the company to compare the entire price of procuring a particular material from various sources. Each cost can be compared between different suppliers and the overall cost that is been set by different suppliers can also be estimated using this concept, which can help the company to know the different price rates of different suppliers and also the difference in the overall cost set by the suppliers for supplying a particular material. Company can use this analysis to select the best supplier who supplies the product at the cheapest cost looking at cost of each particular step that combines together to form the total cost. This will help the company in a huge way in saving huge amount by selecting the right suppliers and thus by reducing the procurement cost of the materials and thus as a result of which the entire operational cost of the company can be brought down in a huge way (Mendoza, 2007). Risk, Sensitivity Analysis, and Real Options The full evaluation of the present value and the cost comparison among the different suppliers helps the management in making the crucial decision. But still these assessments is not enough for the company as they need to analyse the risk factor involved in each choice they make, the amount of flexibility that the choices offers to the company to make the changes based on the changes in the demand and the market. The assessment of the risk involved in making a choice by selecting a particular supplier involves with the way the supplier is capable of meeting the demands of the company and is able to provide the materials in good quality as and when required. As if the supplier fails to supply the material in time and in good quality to the company than the company will face lots of problems in its entire business operations and the company might have to incur huge loss. Thus the risk is needed to be determined before selecting a particular supplier. The sensitivity analysis and the real option concepts are related to the analysis of the flexibility that the suppliers allow to the customers. The proper selection of suppliers helps the company to change as per the requirement and be more flexible which will allow the company to overcome the challenges that it might face from the changing situation of the market. This allows the company to get a competitive advantage over the competitors and also have a good growth rate without lacking behind the global market (Kendall Heller and Boykin, 2010). Identification of activity cost drivers and driving activity costs to vendors The various costs that are involved in the overall activity of procurement are like the wages of the finance department, purchasing department, quality department and material handling department, the Opportunity cost, cost incurred in the IT equipment which are used in the process, Warehouse maintenance cost, cost incurred in inspection of the incoming products, the export duty, the warehouse insurance, the cost incurred in the repair equipment which might be needed at the time of failure, in getting the testing equipment and the Obsolescence cost. After looking the quality department at the right activities the next step for the company is to allocate the right amount for the right activity as per the plan through the resource driver. The committed costs are been committed with the committed resources and this is been acquired even before the activity is been performed by the company. This can be done only with the flexible sources which can help in adjusting to the situation very easily and quickly any time of the operations process. The purchase department should look out for the particular points before deciding upon the cost of the procurement. The purchase department must also go through these activities which are negotiating with the vendors, type the purchase order, send the purchase order, check the order confirmation from the vendors, book the transportation medium which is most suitable based on the requirement, check the products coming in from the vendors to the production site and flow them to the production site and also help the production team to schedule their production process based on the incoming materials. All these activities and the cost that the company incurs in each of this activity are very crucial for the organization as it results in either increasing the operational cost or can also help the company in reducing their operations cost. Advantages of using TCO Advantages of using the concept of total cost of ownership in selecting the correct suppliers is been given below. This concept helps in understanding the costs which are associated by selecting a particular vendor for procuring a particular material and also to decide the nature of relationship that the company needs to maintain with the vendor. It helps in understanding the trade-off costs which is incurred in the purchasing decision of the company for the particular product for procuring from a certain vendor. This concept helps the company to identify the opportunity where the company can look to improve and rectify in its business operations which is associated with the vendors and the way it selects the suppliers in a proper way. This concept helps to reduce the overall operational cost of the company by allowing the company management to select the suppliers in a proper way and see that they can procure the materials at a low cost. Conclusion Thus looking at this essay it can be seen that for any company it is very important to make the selection of the suppliers in a proper way so that they can get the right supplier for their process. The companies can use the concept of Total cost of ownership for selecting the right supplier in the right way as this concept gives the company management an idea about the entire cost that the company incurs at every step in the procurement process. This concept helps the company to get the suppliers who are also very flexible and help the company to adjust based on the changing demand in the market and help the company to keep growing with the growing market condition. The selection of the suppliers in a proper way is very important for the company and it is the duty of the supply chain management to see that they make the selection in a proper way and right selectors are been chosen who can supply the materials at low cost and also at right time in good quality. Question b Introduction In the growing competitive global market environment it is very important for the company to select the suppliers very carefully and make sure that they get the correct supplier for their business operation. This will allow the company to get the resources in time and also at the right price which will allow a smooth business operation and also give flexibility to the company organization based on which it can make the adjustments as and when required based on the changing market demand. Companies do face various driving forces which make them to do the procurement process in a proper way and make sure that they can procure the right material at the right time. These drivers do play a big role in making the decision for selection of the right suppliers and also for making the procurement process in a proper way. The company’s also face from the SME’s as they are the facilitators and also cause barriers in supplying the material to the company on time and as required. In this essay the driving forces which lead to make the procurement process for the automobile company is been seen and also the facilitators or the barriers that an automobile company faces from the SME’s can also been understood through this particular example. Discussion The automobile industry in the global market environment has grown at a good fast rate and it has many companies which are strong competitors of each other. There are many huge companies like Toyota, Honda, Hyundai, Volkswagen etc. These companies have a very strong driving force which makes the company to make their procurement process in a proper way, while it also faces many barriers and also facilitators form the SME’s while procuring the materials for their operations process. Drivers are the forces or the reason that forces the company to build relation with the suppliers; these forces are like the cost of procurement, flexibility, quality of raw materials etc. These help the top management to make the crucial decisions for the company at the right time (Burt 2002). Barriers are the various forces that the company faces from the suppliers in the form of the technology and the environments for procuring the materials. Facilitators are the various characters that the small companies keep in mind whi9le they supply the materials to the company. The facilities that the SME’s provides to the company are like the managerial philosophy and with new technology so that the company can improve their business operations. Drivers In case of an automobile industry the driving forces that encourage the company to make the selection of the suppliers in a proper way so that they can procure best quality materials can be seen. The automobile manufacturers look to outsource most of its business process to increase its efficiency and also to make the process more effective. The various materials that are been procured by the automobile manufacturers are like thee paint, tyres, steel sheets, nuts and screws, equipments, safety equipments etc. Every material is been procured from a different supplier and the company looks to have a strong analysis for selecting the right supplier so that they have a smooth business operation. The driving force which makes the companies to make this decision is that they need to have a flexible production process along with producing high quality products and also maintain a continuous flow in the production process without any stoppage in it. The companies look to implement the Just-In-time system in their process to make sure they reduce their storage cost and also have a continuous flow of materials from the suppliers. The other driving forces are like the local demand conditions which do keep changing from time to time based on the preference of the customers as the nature and sophistication of the customers changes depending on their needs and wants, the input conditions of the company like the presence of high quality, the specialised inputs that are available to the firms etc., the decision is been made based on the competitors strategy present in the market which does affect the business process of the company, the drivers are depending on the supporting industry for the automobile manufacturer like the tyre companies, engine manufacturers, seat cover makers etc. all these driving forces does play a big role for the company to make decision for their procurement process and for selecting the suppliers in the exact way that is needed (Assaf Bonincontro and Johnsen, 2005). For a management of the automobile manufacturing company it is very important to see that they can procure the materials at the right time and at the right price so that they don’t incur any loss in their business operations. The company needs to have a good vendor management process and use various information technology software’s to maintain the data of the suppliers and to analyse the overall cost of procurement along with the price of each step of procurement process so that they can get the materials at a good rate and also they can reduce their operational cost by a huge extent. This saving of the operational cost helps the company to increase their revenue and also profit margin by a huge way. The suppliers should also allow the company to be flexible and make the right decision of making the required changes as and when required based on the changing global market environment. This will help the company to make sure they can come up with latest automobiles in the market and also have a good competitive edge power the competitors. The strategies implemented by the competitors in selecting their suppliers also are been seen keenly by the company and based on which the company also makes its decisions to stay in competition with the competitors and also get benefit as they can charge for more discounts from the suppliers. Apart from this the companies policy to maintain a good quality and the particular standard is been followed by the particular automobile manufacturer depends in a huge way how the company selects its suppliers as the quality of the materials are been set based on the standards that are been set in the company for their production process. Facilitators The facilitators for the automobile industry are the various small scale industries which helps the company to grow their business operation in long run. These facilitators are the group of industries which provides the management solutions to the companies for their various business policies, the vendors who provides materials to the company based on the company’s requirement of quality, quantity and in time to allow the company to have a continuous flow in their production process, the partners of the company who allow the company financially and also with management decisions so that they can have a continuous business process, the end users are also a facilitator for the company as they provide feedback and also knowledge to the company in the way they need to improve their business operations. Facilitators are generally the supporting elements for the company who help the automobile manufacturing company to expand and grow in a huge way and make them feel comfortable and smooth with their business operations. The company must maintain a good relationship with the facilitators so that can get help from the small manufacturing enterprises in different forms to make their business operation more efficient and productive and also to improve the quality of the material that is been produced by the automobile manufacturers for the global market over the years. Good relationship with the SME’s which are the facilitators will also help the company to make good strategies for their continuous growth and also for having a competitive edge over the competitors present in the market. Barriers Barriers to the automobile manufacturers from the suppliers for getting their materials fall under the external environmental barriers for the company. These barriers do affect the company production process and creates lot of obstacles in their smooth production process. The small manufacturing enterprises which supplys raw materials to the automobile manufacture sometimes do create a lot of barriers for the company in the form of the cost at which they supply the materials, the time they take for supplying the material and the quality of the materials that they supply to the company whether they do meet the standards been set by the company or not is a big issue that the automobile company like Toyota, Honda etc needs to have a close look. These barriers do cause a lot of obstacle for the company as it affects them in a huge way to get the raw materials from the suppliers in an effective way and also more amount of cost is incurred in the procurement process for the company as a result of which the overall operational cost of the company does increases by a huge amount and the company’s revenue goes down even the profit margin. The automobile manufacturing company needs to see that it takes care of the barriers in a proper way so that the company doesn’t faces these problems and have a smooth production process (Baily, 2009). The drivers, facilitators and the barriers are all the major factors for the company that makes the company to see that they select the suppliers in a proper way and have a strong vendor management process in their process which allows the company to have a constant growth in their business process. These factors make the company to make strong strategy for their business process. Conclusion Thus looking at this essay the driving forces, the facilitators and the barriers that make the company to choose the suppliers in a proper way can be seen. For the automobile companies it is very important to look towards the various driving forces for making the selection of the suppliers in a proper way so that they can procure the right material from the right place and at the right cost. This helps the companies to have a continuous flow in their production process and also allow them to be flexible based on the changing market environment. These forces does help the company to get the materials at a low price thus keeping the overall operational cost minimum over the time and increase its revenue and profit margin by a good percentage. The company needs to get encouraged from the facilitators and look to always take their help to make sure they have continuous improvement in their process and also have a continuous growth. The company needs to take care of the barriers in a proper way so that it doesn’t face any obstacle from any of the barriers that can affect the successful running of the organization and also affect the way the company goes around with its business process. References Assaf, M. Bonincontro, C and Johnsen, S. (2005). Global Sourcing and Purchasing Post 9/11. America: J. Ross Publishing. Baily. (2009). Procurement, Principles & Management. 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