Total Cost of Purchasing at Duni AB: Development of a Cost Model

Abstract: BACKGROUND Through global competition with possibilities for companies to set up production and to secure supply from all over the world the role of purchasing has increased within businesses. In order to achieve business results, a well-working purchasing department plays an important part. To contribute, the purchasing function should not only focus on getting the cheapest price possible, but to take part in shaping strategic directions for their corporation. PROBLEM Duni AB and the business area Meal Service has recognized opportunities in developing their sourcing work by bringing a wider cost focus into their work. By this, they think that they could identify cost saving areas and validate that they make the right decisions based on more aspects than they are doing today. The main objective was therefore to develop a cost model including multiple cost elements besides the purchasing price. PURPOSE The purpose of this study is to create a cost model that Duni Meal Service can use in sourcing and economic life cycle decisions, showing a holistic view of the total cost of purchasing. METHOD Since the objective was to develop and deliver a purchasing cost model to Duni Meal Service a constructive research approach was applied. The focus was on bridging theory and practice and an interview study was held at the principal company, to gain practical knowledge and insight. This together with the theoretical framework, created from our literature studies, worked as a foundation in the analysis and the development of the cost model, as well as for further recommendations given to Duni. THEORY Purchasing Management was investigated, including theory about supplier selection and cross-functional integration. Literature about trade companies was also sought for, since this thesis is limited to traded goods at Duni. In addition, a section of Purchasing Measurements was added since it was mentioned that this might be one of the background issues at Duni. Furthermore, a set of purchasing cost models have been researched and presented. These models are Total Cost of Ownership (TCO), Activity-based Costing (ABC), Landed Cost and Life Cycle Costing (LCC). When the cost models were studied the objective was to find information regarding the following areas: general information, cost elements and cost drivers, applications and success factors. These areas were then summed up and discussed in order to find some patterns in the literature. EMPIRICAL DATA All empirical data collection was made at the principal company, Duni, by interviewing a lot of employees from various functions and at different levels in the business. The focus areas in the interviews were the same as during the literature review: general information, cost elements and cost drivers, applications and success factors. The interviews were mainly held with people from the business area Meal Service or from the Supply Chain department, including the warehouse and logistic functions. ANALYSIS & CONCLUSION Some conclusions were made when comparing the theory with the empirical data in order to find the best possible solution for Duni. It was decided which cost elements and cost drivers to involve in the cost model development and it was also analyzed which the typical application areas of the cost model should be. It was clear that the theory and empirical data were aligned at many areas but the scope of this thesis did not suit all of the studied cost models. THE COST MODEL To fit the needs at Duni Meal Service a Duni specific cost model was created. However, this cost model has almost all the same characteristics as a Landed Cost model and can be seen as a limited version of it. The cost model covers the stages from the point where Duni takes over the ownership of a product from the supplier, via the inbound logistics into the warehouse, and then all parts of the warehousing. Outbound logistics is not involved. The cost model should be used in various sourcing decisions as well as product life cycle decisions such as phase in or phase out decisions. The cost model was created in Excel and along the cost model a user guide and a model manual was developed. Also further guidelines and recommendations were provided in order to successfully implement and maintain the cost model at Duni. Some of the recommendations were that they need to work more cross-functional at Duni in general and that they should align the KPIs to the corporate strategy and take actions accordingly, based on the information provided by the cost model.