Bridging the Gap Between Supplier Total Cost of Ownership and Data Envelopment Analysis

Supplier total cost of ownership (TCO) is a management accounting technique to evaluate the direct and indirect cost of procured product or service. The traditional TCO techniques attribute costs to different operations using interviews with employees from different cost centres. These techniques are considered to be labour intensive and complex, limiting the application of TCO in the industry. Literature indicates that classic data envelopment analysis (called TCO-based DEA) is a valid alternative for TCO calculations as it requires less effort and time. However, contrary to TCO techniques, TCO-based DEA requires multiple supplier-specific weights. From practitioners’ standpoint, it is hard to accept that suppliers would receive different weights in the evaluation of a product or service. Additionally, although TCO-based DEA speeds up the supplier evaluation process, managing the information from several cost centres is still considered to be time consuming. This is mainly due to the fact that TCO data gathering and processing often involves imprecise data (e.g. missing data, subjective judgment data, forecasting data) that can be modelled as interval or ordinal preference values. The objective of this paper is therefore to develop a novel TCO-based common set of weights imprecise DEA model (CSW-IDEA) as a more parsimonious approach to TCO calculation taking into account managerial concerns on the weights, information gathering and availability. The proposed methodology is validated on real-life data from 120 companies supplying four key components to an international firm. The proposed CSW-IDEA model provides more accurate approximations for the TCO scores than existing TCO-based DEA from the literature. Moreover, because the proposed CSW-IDEA model can handle imprecise data, less time and effort for information processing is required which supports the use of TCO in practice.