Risk adjusted total cost of ownership model for strategic sourcing decisions

Abstract

The aim of this research is to develop a strategic sourcing decision model that incorporates the cost elements and risk elements. This paper demonstrates the effect of supply chain disruptions on total cost of ownership (TCO) in sourcing decisions. A suitable methodology was designed to conduct this research. Brainstorming method was used to identify relevant cost and risk factors in a sourcing context. Then, failure mode and effects analysis and analytic hierarchy process was used for quantifying and prioritising supply chain risks in sourcing context. This research propounds that an actual cost of sourcing is much higher than TCO. When buying firm considers only TCO model, then TCO comes at 156.75 M INR and when buying firm considers combined TCO and risk, then total cost comes out to be 270.89 M INR. Riskiness of supplier and susceptibility of supplier's environment to risks greatly affects total cost of doing business.