Using TCO when buying or selling
In our last column, we identified national policies that will help bring manufacturing back from offshore, thereby improving the country’s economy, employment and budget deficit. Now, we would like to discuss how your company can use free resources from the Reshoring Initiative, including the Total Cost of Ownership (TCO) Estimator, to more accurately determine the real profit and loss impact of reshoring or offshoring. After doing so, your company will undoubtedly decide to bring some work back, which will help our economy while we wait for the politicians to act.
Several trends are driving the shift from offshoring to reshoring: the rising costs of offshore production; the impact of distance on innovation, flexibility, responsiveness, inventory and availability; improved competitiveness via automation and lean; and the increased use of the more sophisticated TCO model to quantify the hidden costs and risks of offshoring. Companies are increasingly deciding to use a “local for local” strategy and bring production and sourcing closer to home.
The economic logic of TCO is built around the savings achieved by producing or sourcing locally. The savings from low offshore wages and purchase prices are increasingly offset by dozens of hidden costs. To help quantify those costs, the Reshoring Initiative provides tools to help companies decide whether their overhead will come down more than their manufacturing cost goes up when sourcing locally. Using TCO will help your company more accurately assess the total microeconomic impact of offshoring or reshoring decisions.
Our user data shows that, under current conditions, if companies use the TCO Estimator instead of price to make their decisions, they can reshore an average of 25 percent of what they have offshored and thus improve their profitability. The TCO Estimator typically closes a 15 to 20 percent price gap, but some companies find that the analysis is worthwhile even if the gap is as much as 50 percent.
Many companies have procedures, cultures and reward systems that keep them tied to rudimentary cost models, such as purchase price variance (deciding on the basis of price only). As many as 60 percent of companies still use purchase price variance, wage arbitrage or landed cost to make sourcing decisions instead of the more complete TCO.
The TCO Estimator is a free online tool that helps companies account for all the variables associated with the true total cost of reshoring and offshoring, such as overhead, balance sheet, risks and other business considerations. We make the TCO Estimator available at no cost on our website, along with instructions for use. You can even contact us for help using the tool.
Buyers use TCO Estimator to assist them in evaluating sourcing options. Domestic suppliers use the TCO Estimator as an objective sales tool to help buyers quantify the advantages of domestic sourcing. For example, we recently helped an Illinois manufacturer of printed circuit boards save a $25 million order vs. a Chinese competitor by showing the customer that the Illinois supplier provided the lower TCO, even though it had the higher price.
Please visit our website (www.reshorenow.org) to:
- Calculate TCO with our free online Total Cost of Ownership Estimator.
- Submit your own reshoring case for free publicity.
- Search our library to see which of your competitors are reshoring and to find sales prospects committed to domestic production.
- See how you can help the Reshoring Initiative bring back jobs.
Accelerated reshoring will promote national economic stability by adding more jobs, increasing individual and corporate tax revenues, and decreasing the need for unemployment compensation and other government expenditures. By reducing our trade deficit, reshoring can increase U.S. manufacturing by 25 percent, curtail unemployment and the budget deficit, improve income equality, strengthen our defense industry, and motivate skilled workforce recruitment.