A Deeper Dive into Total Cost of Ownership: Part 2
In my December column, I discussed how total cost of ownership (TCO) can reveal the hidden costs of offshoring and determine the real profit and loss impact of reshoring and offshoring. Now, we will continue our in-depth look at the Reshoring Initiative’s Total Cost of Ownership Estimator—its benefits, who should use it, and why.
Placing a real value on shipping, time to market, travel, intellectual property risk, increased inventory, and struggles with communication and quality issues can tip the scales in favor of producing at home. Total cost analysis can identify more than two dozen hidden relevant costs, each of which represents up to 2 percent of a product’s final total cost. Savings from lowering or eliminating these costs can offset some or even all of a 15 to 30 percent advantage in purchase price enjoyed by products made in low-labor-cost countries.
Research shows many companies can reshore about 25 percent of what is offshored and improve profitability if they use TCO instead of price to make their decision. That’s the equivalent of 1 million manufacturing jobs.
Figure 1 shows an example of the output generated by the TCO Estimator. Notice, if a company is basing a sourcing decision solely on price, it will see an initial 30 percent advantage offshore: $70 (the red circle) vs. $100 (the blue triangle). However, by applying TCO, we the actual total cost gap is only 10 percent, and that gap will close over the next three years. Manufacturers may find that it is most profitable to keep any new work here and plan to bring offshore work back, by investing in automation, equipment and training or by finding a local supplier.
Here are the benefits of the TCO Estimator:
- Customized: Calculations are based on your unique data.
- Flexible: Users may skip values that they feel are not essential.
- User-friendly: Automatic calculation of freight rates for 17 countries. Explanations and references for input factors are included.
- Transparent: Cost calculation formulas are shown on the results page.
- Credible: Recognized by the U.S. Commerce Department.
- Affordable: Free to use.
The Estimator is for businesses of all sizes and allows users to determine which sources best meet their company’s profit and strategic objectives. The software can be used by accountants, manufacturing management, industrial engineers, strategic planners, line managers and supply chain managers. One supply chain manager routinely uses the Estimator whenever Chinese prices are within 50 percent of U.S. prices.
The TCO Estimator is also useful for:
- Salesmen to sell against imports. We helped one contract manufacturer save a $60 million order vs. China by using the Estimator to quantify other costs for the customer.
- Economic development groups and government leaders to enable regional reshoring and foreign direct investment.
- Universities to train the next generation of manufacturing and supply chain managers.
The time is right to make more American-made products available to U.S. consumers! As companies adopt a more comprehensive total cost analysis, they are finding that the hidden costs of offshoring often counterbalance any savings from cheap labor abroad. These companies are investing and sourcing in the U.S. because it makes good economic sense for them to do so.