The adoption of total cost of ownership
for sourcing decisions––a structural equations analysis
Marc Wouters
a,
*
, James C. Anderson
b
, Finn Wynstra
c
a
School of Business, Public Administration and Technology, University of Twente, P.O. Box 217, 7500 AE Enschede, The Netherlands
b
Kellogg School of Management, Northwestern University, USA
c
Erasmus Research Institute of Management, Erasmus University, Rotterdam, The Netherlands
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.
Ó 2004 Elsevier Ltd. All rights reserved.
Introduction
This study looks at the adoption of total cost of
ownership (TCO) as an application of activity-
based costing (ABC) concepts and tools to sourc-
ing strategy. TCO is a cost accounting application
that enables purchasing decision-makers to com-
bine value and price in making sourcing decisions.
TCO analysis quantifies the costs involved in
acquiring and using offerings, such as transaction
costs related to purchasing activities (e.g., order-
ing, freight, quality control), and the costs related
to poor quality (e.g., rejection, rework, and war-
ranties) (Carr & Ittner, 1992; Ellram, 1995)
Activities that are part of the scope of TCO occur
within the purchasing department as well as in
other departments. As in activity-based costing,
cost drivers can be at various levels, such as unit
level (e.g., purchase price, quality control cost
when each item must be inspected), batch level
(e.g., costs of creating a purchase order, inspecting
an order received), supplier sustaining level (e.g.,
cost of identification and certification of a sup-
plier), and product or part sustaining level (e.g.,
cost of maintaining technical product informa-
tion). A notable difference of TCO with typical
ABC applications is that costs need to be captured
*
Corresponding author.
E-mail addresses: m.j.f.wouters@utwente.nl (M. Wouters),
jc-anderson@kellogg.northwestern.edu (J.C. Anderson), fwyn-
stra@fbk.eur.nl (F. Wynstra).
0361-3682/$ - see front matter Ó 2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.aos.2004.03.002
Accounting, Organizations and Society 30 (2005) 167–191
www.elsevier.com/locate/aos