03-05-2014, 12:55 PM
Life cycle cost based procurement decisions A case study of Norwegian Defence Procurement projects
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Abstract
A Norwegian Ministry of Defence publication states that when procurement decisions are made, systems that yield the lowest possible
life cycle cost (LCC) for the Norwegian Defence must be procured, even if this means that initial procurement cost becomes higher. How-
ever, several projects within the community are still carried out and reviewed based on initial procurement cost alone. This study inves-
tigates four hypotheses, based on agency theory and earlier LCC work, in order to help explain why this is happening. A questionnaire
was administered to all projects currently running in the defence community. Findings regarding project uncertainty, information sym-
metry, the project leader’s attitude and knowledge about LCC, as well as control variables are discussed both towards theory and in
terms of managerial implications.
Introduction and research question
In 1998 General Steinar Jøssund, Head of the
Norwe-gian Army Material Command said:
The Norwegian Defence’s ongoing and future organiza-
tional change, demands that the present focus on costs asso-
ciated with material system procurement is changed from
only considering the initial procurement cost to looking at
the material systems’ total life cycle cost.1
Earlier research has presented cases where maintenance
and logistics support costs for a system can be cut with up
to 50% by using integrated logistic support (ILS)2 and life
cycle cost (LCC) analysis [1].
Theory framework
The concept of LCC, sometimes called Total Cost of
Ownership (TCO) has been discussed, and examined empir-
ically but with limited scope [4]. Literature review has not
revealed many studies that could help answer the main
research question raised in this study. One study was found
where the authors looked into the adoption of total cost of
ownership for sourcing decisions [6]. The main difference
between that study and this study is that in our case it is
already decided by the mandate group that LCC should
be used. The fact that the mandate group has decided that
LCC should be used brings forward what is known as the
mandate problem [7]. Organizations, such as the procure-
ment projects of this study, are established by owners. It
is the owners (the mandate group) who decide which goals
and tasks the organization is going to have [7]. In order to
reach any preset goal, the mandate group must implement
a governance system that makes sure that the leaders and
employees of the organization implement actions to reach
the goal. According to Greve [7], one of the main theories
that regulates the relationship between the mandate group
and the organization leaders, is agency theory.
Research model and hypothesis
The research model (Fig. 1) is based on the belief that
agency theory constructs along with the knowledge con-
struct4 to a certain degree can explain why some procure-
ment projects within the Norwegian Defence focus on life
cycle costs while others do not.
In the research model the dependent construct is there-
fore the project leaders’ use of life cycle costing in procure-
ment decisions. The independent constructs are project
uncertainty, information symmetry, attitude towards LCC
and knowledge about LCC. In addition to the independent
constructs, some control variables were examined and in the
final regression model independent dummy variables of the
control variable found to be significant are included.
Regression analysis and results
The VIF values in Table 3 shows that multicollinearity is
not a problem. Hair et al. [12] estimate the minimum R
square that can be found statistically significant with a
Power of 0.80 with 5 independent constructs and a sample
size of 78 to be approximately 17%. The total population in
this study is 150, and hence a sample size of 78 is fairly
large, it could therefore be argued that even a lower R
Square would be significant. However, the final model gave
a very acceptable result with an R square of 24.1%.
The residuals of the regression were checked for linearity
and homoscedasticity with the help of SPSS’ scatter plot,
and normality with the help of the Normal Probability Plot.
The findings did not indicate any nonlinear pattern to the
residuals. Further no pattern of decreasing or increasing
residuals can be seen, thus indicating homoscedasticity and
finally no substantial or systematic departure is observed
in the normal probability plot. Hence the regression variate
is found to meet the assumption of normality [12].