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In the 1970s, distributors and intermediaries began to take an interest in the profit and unit costs of individual products and stock-keeping units (SKUs). A method similar to ABC, called “Direct Product Profitability” (DPP), was developed and applied to measure the amount of employee effort (labor) in handling relative to price. However, this method only took into account direct costs, excluding indirect and fixed costs. In the 1980s, managers responsible for purchasing functions began to analyze the Total Cost of Ownership (TCO). TCO indicates that the price of a product on a vendor’s invoice represents only a portion of the total cost associated with acquiring that product. Supplier behavior affects the costs of ordering, shipping, receiving, and inspecting goods. A vendor may be the cause of additional costs related to low product quality or delayed delivery. Hiding these types of costs in fixed or indirect costs makes them invisible. ABC improves the quality of the TCO metric by revealing these hidden costs and allowing them to be linked to a specific supplier; subsequently, ABC allows for the accurate assignment of these costs to purchased goods, which, when compared with the purchase price, provides the actual TCO value.<\/p>
TCO – Total Cost of Ownership includes indirect and fixed costs that were excluded from calculations using DPP – Direct Product Profitability. By applying TCO to their suppliers, a company can assess the impact of inter-company relationships on its own costs. Using TCO, firms can negotiate or even select partners from higher levels of the chain, guided by the magnitude of total acquisition costs. TCO can also make buyers aware of the impact of their behavior on their suppliers’ costs. In the supply chain, there is two-way cooperation between trading partners. In the 1990s, TCO allowed companies to partially assess how their internal changes (internal reengineering) and investments in technology affected the costs of other supply chain members. Ultimately, it is the “total landed marketplace costs” for a given supply chain that causes the customer to make a purchase at the end of the value chain. With the help of DPP and TCO, we can only capture the intra-company component of costs related to acquiring, trading, and warehousing products.<\/p>
The article comes from the magazine “Logistyka” 2001\/1.<\/div>
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