Resource 3: Reevaluation
Reevaluate! Go beyond wage arbitrage, purchase price variance and landed cost. Total Cost of Ownership (TCO) and the Cost Differential Frontier (CDF) may show that you will be equally profitable with a domestic manufacturing cost up to 20% to 35% higher than offshore. Both tools are recognized by the U.S. Department of Commerce for use in the reshoring/offshoring decision. CDF is a more detailed calculation of two of the thirty TCO costs: obsolescence and opportunity cost. We suggest using both tools, adding the effects and netting out the two TCO Estimator cost duplications.
Total Cost of Ownership Estimator™
Total Cost of Ownership Estimator™The Total Cost of Ownership (TCO) Estimator is a free online tool that helps companies account for all relevant factors — overhead, balance sheet, risks, corporate strategy and other external and internal business considerations — to determine the true total cost of ownership. Using this information, companies can better evaluate sourcing, identify alternatives and even make a case when selling against offshore competitors. All inputs are user generated except freight which is calculated to Chicago. Explanations and references are provided. All calculation formulas are shown for transparency. The system automatically generates for each source, the current total cost, a forecast for 5 years and a graph showing the mix of hard and more subjective costs. Has been used by 1,500+ individuals/companies. Here is a guide to getting started using TCO.
Cost Differential Frontier
Cost Differential Frontier
The free Cost Differential Frontier uses quantitative finance techniques to calculate the mismatch cost arising from long lead times, answering the question "How much cheaper does a long-lead-time supplier have to be to compensate for the increase in demand-volatility exposure?" It was developed by Professors Suzanne de Treville and Norman Schürhoff of OpLab at the University of Lausanne's Faculty of Business and Economics (HEC). This video further elaborates the basic concepts underlying the tool.Michelle Comerford – PH: 216.973.8872 - Website
Domestic vs. Foreign Supplier Decision Calculator
The Domestic vs. Foreign Supplier Decision Calculator, provided free online by Accurate Forming, is a tool for deciding whether to source formed parts domestically or offshore.
You will need some data you have not been routinely using if you have not been calculating TCO and CDF. For example:
- Your internal data. Some may have to be developed, e.g. for each product: inventory levels, warranty cost, travel cost to visit supplier, emergency air freight, order volatility, etc.
- ACETool. This U.S. Commerce Department website was developed to help companies access the data necessary for the TCO calculation/reshoring decision.
- Consumer preference for Made in USA for estimating the impact on unit sales.
- Consumer behavior: Data on actual sales volume and pricing impacts of Made in USA vs. import labels is harder to find. Several cases show moderate increases in volume, sometimes even at a higher unit price.
- FM Global created an interactive supply chain resilience index that demonstrates how the U.S. and other countries compare. High U.S. supply chain resilience favors reshoring when compared to exposure to risk in multiple low resiliency countries.