Outsourcing - Do You Know Your Total Cost of Ownership?

Posted by Matt Fehrmann on Jan 31, 2014 2:30:00 PM

blank.pngOutsourcing manufacturing work to lower-cost countries can be a tough decision for U.S. companies to make—as much as they want to keep jobs in America, they feel the higher labor costs are too much of a disadvantage to compete effectively in the global marketplace. Also, with the speed of business being what it is today, and everybody still doing more with less (the work ethic left over from the Great Recession), the decision to go off shore could be made without the proper due diligence—a possible mistake.

“Most companies make sourcing decisions based on price alone, resulting in a 20 to 30 percent miscalculation of actual offshoring costs,” says Harry Moser, president and founder of the Reshoring Initiative (www.reshorenow.org), an industry-led effort to bring manufacturing jobs back to the United States.

According to Moser, too many company leaders don’t fully understand what Moser calls “total cost of ownership,” or TCO. TCO includes inventory carrying costs, travel costs to check on suppliers, intellectual property risks, and opportunity costs from product pipelines being too long. When TCO is factored in, low-cost countries often look less attractive. In fact, for some companies, after running the calculation, staying in the U.S. is closer to a break-even situation (or can even more profitable) compared to setting up shop overseas.  

To make it easier to determine TCO, Moser created the Total Cost of Ownership Estimator™, a free online tool that helps company leaders account for all relevant factors when determining their total cost of ownership, including overhead, balance sheet, corporate strategy, and other external and internal business costs.

“The Total Cost of Ownership Estimator is a complimentary tool that enables aggregation of all cost and risk factors, into one cost, for simpler, more objective decision-making,” says Moser. The program incorporates 29 cost factors and automatically calculates freight and duty rates. Once a company’s unique data is entered into the estimator, a cost-of-ownership analysis is produced that includes:

  • Calculations of each source’s cost

  • An accumulation of all costs into cost categories

  • A grand total cost

  • Line charts showing each source’s current price, total cost of ownership, and five-year forecast based on the user’s forecast of wage and currency changes

  • Line charts showing your cumulative cost by category

The TCO Estimator is a useful tool forcompanies that are currently offshore and thinking about coming back to the U.S., U.S. companies that are thinking about going offshore, local suppliers that compete with offshore sources, and consultants or economic development groups that advise on the benefits of reshoring.

Moser knows what he is talking about. With more than 45 years of manufacturing experience, Moser was inducted into the Industry Week Manufacturing Hall of Fame in 2010. He was also named Quality Magazine’s 2012 Quality Professional of the Year and participated in President Obama’s 2012 Insourcing Forum.

The bottom line is that the Total Cost of Ownership Estimator enables key leaders (executive teams, supply chain managers, manufacturing managers, industrial engineers, and accountants) to be as informed as possible about costs before making key source decisions that impact their company’s profitability and strategic objectives.

Once they know where they stand with TCO, the best way for companies to improve their TOC at home is “by maximizing recruiting and training, lean programs, QRM, innovation, and automation,” says Moser.

Moser encourages companies and communities to use the free tools at www.reshorenow.org to better understanding the economic feasibility of reshoring.