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Analyze TCO to Make a Case for Onshore Sourcing

Sixty percent of companies make sourcing decisions based on rudimentary metrics, such as wage rate, ex-works price or landed cost, often resulting in a 15 to 30 percent understatement of actual offshoring costs. An analysis of all relevant factors—overhead, balance sheet, risks, corporate strategy and other external and internal business considerations—is a better determination of the true total cost of a part or assembly.

Image courtesy: Pixabay

Image courtesy: Pixabay

Many U.S. business have found, through a total cost of ownership (TCO) analysis, they can remain competitive onshore.  The Reshoring Initiative, for example, provides a free online Total Cost of Ownership Estimator to assist U.S. manufacturers.

When companies find themselves competing with a lower-priced offshore product, we suggest offering to help the customer compare the TCO of your offer vs. the lower-priced offshore offer. If the buyer resists, gather whatever information you can from other contacts at the company, do TCO from the customer’s perspective, and review the results with the buyer. It is best to be conservative and understate the hidden costs.

Here is a real-world example of a company that used TCO to sell against imports. Electronics manufacturing services provider Morey Corp. was pursuing a $60 million contract ($15 million per year for four years) vs. a lower-priced Asian competitor. With the help of the Reshoring Initiative, Morey used the TCO Estimator to show the customer that although Morey’s price was higher, the TCO was lower. Tony Woodall, Morey’s vice president of sales reported, “We used the TCO calculator from the Reshoring Initiative. This tool framed the costs and risks of both options and was a crucial piece to our winning strategy.”

There is also a case to be made regarding problems with offshore sourcing. End customers have reported late deliveries, poor quality, intellectual property theft, excess inventory, lost orders and travel costs. Onshore competitors can point to very public problems with offshore deliveries, such as the West Coast dock strike or natural disasters. Ask about your customer’s plans to prepare for President Trump’s drive to bring back manufacturing jobs.

More than 1,000 companies have already successfully brought the manufacture of parts or products back to the U.S. from offshore. The Reshoring Initiative website provides a slide file of 400 reshoring cases, a case studies file, and a library (with an advanced search function) where you can find a collection of real-world success stories. You may have to overcome senior management’s directives that X percent of products must be offshored, but what a great opportunity to meet senior management.

Work with natural allies within your customer’s company. The lean, green, compliance and quality champions should all support domestic sourcing. The line management should be receptive to ideas to improve turns and from-stock availability while reducing warranty and travel costs.

Many U.S. OEMs have outsourced design, build and packaging of complex products, such as major appliances, to Chinese contract manufacturers. They will want to find similar support from U.S. suppliers. Broaden your value-added offerings.

Buyers often ask a salesman, “Can you match the Chinese price?” Your response should be, “Probably not, but let’s see if I can offer you a lower total cost that increases your profitability.”

3 comments on “Analyze TCO to Make a Case for Onshore Sourcing

  1. Redding McLemore
    January 29, 2019

    Excellent article!  There are so many hidden costs to offshoring.  Often, the offshore supplier will bid the work very low so as to be very attractive, then make a profit by substituting components from lower quality suppliers.  They complain about the quality they receive but have not figured in the TCO of their own processes.    It is as if you are told everything you want to hear, and then everything changes once you leave.  These suppliers know you will probably not be back until next year so the risk is low.  To control the AVL and hidden outsourcing, there is an industry of independent auditors in popular offshoring countries whose job is simply to audit your suppliers to ensure they are building as contracted.     Of course, not every company is like this, and there are a multitude of factors behind the actions that the outsourcing companies make, from cultural to political to the maturity of private competition and ethics in their country. These make for a far more complex decision than simply landed cost.   

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