woensdag 8 juni 2011

Nothing new about ‘Total Value of Ownership’

When I saw a report of Accenture (2011) I got triggered to write this text. Why? Well Accenture says the right thing when they are stating that Total Cost of Ownership (TCO) models are well accepted these days. It continues to argue that these days, procurement is more and more focusing on Total Value of Ownership (TVO), nothing wrong with that, I couldn’t agree more!  
What then, triggered me to write this post? Well not just Accenture, but many more organizations, experts, books, etcetera argue about the present focus on TVO, and many of them (not all), as if TVO is something new which they write or talk about for the first time. But it’s not something which just has appeared today, it’s an incremental trend (don’t take trend to literally) which has started years earlier, especially in countries like China and Japan.

Even in scientific articles, the Total Value of Ownership has been described before.
Morssinkhof, Wouters & Warlop wrote in 2005 already about the Total Value of Ownership. They argue that The TVO concept recognizes that the value of a higher priced offering may come from revenue improvements and not only, or not at all, come from total cost savings. They continue to argue that a firm may be able to offer a better end-product to its (end) customers (at the end of the chain) when working together with a particular supplier (and with that increase its revenues).

When going further back in time we see that, in 1989, Michael Porter also wrote about a concept which is quite similar, or has at least some overlapping parts (maybe at a somewhat a higher theoretical level. Indeed… Value Chain Analysis (VCA). Value Chain Analysis as proposed by Porter (1989) captures both the TCO and the TVO perspectives by focusing on costs and differentiation (value) at the same time. By having this combined focus, VCA strives for a competitive advantage which is expected to result in an increase in profitability.

In the spring of 2010, I started writing my Master Thesis. I was writing about information exchange between buyers and suppliers, because I experienced the difficulties in sharing information between buyers and suppliers (both parties were hesitant to disclose information) while both parties realized that sharing information (in many cases) is profitable. I used several theoretical frameworks, but besides that  I also had to describe ‘profitability’ with respect to buyer-supplier relationships. The idea of TVO attracted my attention, but at the same time I realized that cost (TCO) should be taken into account as these two (TVO and TCO) are  inextricably linked with each other (see my thesis how cost (TCO) and revenue (TVO) interact with each other).  In order to clarify  profitability within a buyer supplier relationship, I combined the two perspectives and made one new perspective of it:
Total Inter-firm Profitability perspective. The TIP-perspective looks at the total cost incurred and the total value created by a buyer and supplier for a specific product/service-transaction in that buyer-supplier relationship. It refers to the total profitability of a (part of the) supply chain instead of the profitability of one focal organisation.

To be clear, this post is not about what perspective is better, more useful, etcetera, because that is dependent on many other things (maybe something to write about later), but the goal was to show you that TVO is not as new as some people say it is.  
Yes: Nowadays, TVO is very relevant in procurement (and probably will be coming years? Decennia?)
No: TVO is nothing new

1 opmerking:

  1. The concept ‘Total Value of Ownership’: A case study approach

    An article by Hurkens and Wynstra