Reducing the total cost of supply through risk-efficiency-based supplier selection in the EPC industry

While risk is becoming the decision driver for a proper supply performance, and supplier selection (SS) is used to mitigate the supply risk, the few existing SS approaches for optimization under uncertainty are typically prescriptive. This shortcome has been overcome through a risk-efficiency-based supplier selection (REBaSS) approach, which is an application of the total cost of ownership (TCO) approach and gives supplier-specific guidelines for immediate and later interventions, so that an average supply cost reduction may be expected, if compared with the traditional TCO. The purpose of the research is to assess the expected positive economic impact of REBaSS on the average total cost of supply in the EPC industry, where critical supplies are extremely frequent. REBaSS has been tested on 13 purchasing occasions within an EPC company, whose SS is currently based on TCO. The empirical test of REBaSS within its domain of application (i.e., procurement of critical supplies) shows a total positive benefit that amounts to 1 432 487€, i.e., 4.76% of the total TCOs of the selected sample. As a practical implication, not only does REBaSS allow to overcome the managerial and risk-related shortcomings of the traditional SS approaches (TCO included), it also – due to the fact that the average value of the critical supplies of an EPC company is about hundreds of million Euros – allows for the potential total economic benefit of the use of REBaSS, which can be estimated in the order of tens of million Euros. This confirms the validity – both managerial and economic – of REBaSS as a sound alternative to the traditional TCO, and encourages one to step into a different way of considering the supply risk within SS.