Total Ownership Cost
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The abbreviations CPO stand for Chief Purchasing Officer. TOC, on the other hand, stands for total ownership cost. It is the total of all costs that have a connection to the production, procurement use and disposal of a given asset. It covers expenses such as inventory and transportation costs too. Note that ownership cost goes beyond the purchasing price. (Weele, 2010)
In addition to the purchasing cost, TOC comprises of; transportation cost, customs or duties, warehousing, inventory holding costs, impacts of quality yield rate, servicing cost, projected repair cost and purchasing administrative cost. The CPOs who have a lot of experience find that models developed using suppliers inputs are the most effective in controlling the future costs. (Demir, 2002)
If I were in the on the office of the chief purchase officer of a company such as Nissan company, I would use TOC strategy to reduce the expenses of my company, there by increasing savings. TOC has a number of advantages to the organizations that employ it in their planning.
A company like Honda Company developed a TOC model. Honda learnt that castings constituted thirty two percent of their total spending. Electrical components constituted fifteen percent, while non-production commodities and services constituted twenty percent. This analysis accounted for seventy-five percent of their total spending. (Weele, 2010)
After a deeper search in the 75% expenditure, Honda learnt that the key expense drivers include supplier inventory. Supplier transportation is yet another expense driver. This one comprises of the total expense that the supplier of row materials incurs in the process of transporting them to Honda Company. We also have supplier rejections as well as scrap. These expense drivers comprise of the materials that are faulty; therefore, they ca not be used in the manufacturing process. Scrap, on the other hand, is the waste materials. The last expense driver that Honda identified was supplier material handling driver. (Burrow & Bosiljevac, 2009)
It is important to note that all these costs have a relation to errors in the company, and processes that support the production flow. It is because of the TOC driver research that Honda realized where to focus on the supplier development in supply chain techniques. According to Honda, TOC models help to identify and minimize cost drivers.
Therefore, it is essential for a CPO to have a TOC model in place to enable him to detect such errors and production flow weaknesses for correction. TOC model enhances accurate forecast thus reducing inventory-holding costs. Suppliers learn TOC techniques that help them to control their vendors. It also brings about cost-based targets that facilitate mutual gain sharing. We learn all these benefits of having a TOC model from the Honda Company. (Weele, 2010)
We also learn from Hiromichi, which uses Toyota quality assurance techniques that TOC helps to minimize purchasing target prices and internal costs of a firm. The company guides supplier process improvement and target price initiatives. It supports commodity councils to find the best suppliers available. It performs price-versus-quality trade-offs using industry TOC models. It also conducts a search for innovative sources within the global supply base. More over, it recommends potential gain sharing with high-performing suppliers looking inward to reduce internal costs. (Demir, 2002)
The staff of Hiromichi promotes internal manufacturing cost and waste reduction. It preserves knowledge and skills in critical core processes, as well. The company staff guides initiatives to reduce administrative costs of purchasing. It trains others in industry and financial analysis, as well as negotiation and mediation techniques. The aim of all this is to lower the total cost of purchases. (Weele, 2010)
In order to control the cost of purchasing, Hiromichi learnt from Toyota that it should focus critical decisions on the long term, even at short-term financial risk. It was also necessary to promote leaders who understand processes well enough to teach others. In addition, it should not produce or ship inferior goods; fix the problems instead. It learnt that it should Use process flow analysis to reveal problems. Equally, it should develop exceptional generalists to serve on well-supported teams. (Burrow & Bosiljevac, 2009)
It is crucial to visit the work site to understand an emerging problem. One should also respect suppliers and employees and help them improve perhaps by offering in-job training. There ought to be consensus among the stakeholders to assess and decide, then implement rapidly. Lastly, they learnt that well-tested technology must fit their strategy, not the reverse. (Burrow & Bosiljevac, 2009)
It is vital to produce to demand. This means that the company should not strive for over production. It was necessary to Level out workload and identify the limits of constraints. Standardization of tasks to enable consistency was as well found to be of significant essence. They had to practice continuous improvement of processes through relentless reflection. Wastes in time, touches, movement, costs, and rework had to be eradicated as they contribute highly to increased costs. (Weele, 2010)
From these two companies, we see that for a company to be leading in competitive markets, it has to establish highly efficient management systems. These systems enable the company to have an accurate forecast thus avoiding wasteful expenditures. We can achieve this through the development of TOC models only. (Demir, 2002)
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