Getting a Company Started with TCO
A. Which parts to analyze
1. By sourcing structure
Follow these priorities:
1st Keep existing domestic sources: No new offshoring w/o TCO analysis.
2nd Shift outsourcing back
3rd Repurpose offshore own-facility to serve the offshore market. Incrementally invest domestically to serve domestic market
2. Pain Theory
Start with parts that are causing the company pain:
a. Delivery/air freight/lost orders
c. Excess inventory
e. Late night calls
f. IP loss or risk
g. Regulatory issues
h. Purchase price rising
i. Corruption/violence/natural disasters
3. Use the Library to check what your industry has done
4. Divide parts into families of parts
B. General plan for using the TCO Estimator
1. Run a sample from each family through the Estimator
2. For qualitative factors:
a. Do not expect perfection
b. Achieve relative accuracy: by part and country
3. Review the Explanations on the Inputs page and the formulas on the Results page to help you refine your inputs
4. Review costs on the Results page. If any are unreasonably high or low vs. other factors or vs. the other supplier, reevaluate your inputs.
C. Developing organizational support:
1. Make clear you are suggesting reevaluating, not reshoring.
2. Work with natural allies:
a. Lean: understands that offshoring makes waste worse
b. Green: production and electricity generation in China are much more polluting
c. Regulatory compliance: far less sure, especially at lower tiers
d. Quality: less certain, more difficult to correct quickly
e. Line management: suffering from quality, IP, inventory, travel expense and opportunity cost.
3. See Pain Theory, above.
D. Applying results:
1. Develop rules for each family, e.g.: “offshore price must be X% lower”
2. Seek domestic improvement for cases where TCO is close.
3. For in-house: remember burden will not automatically be eliminated when you offshore or increase when you reshore.
Be sure to plan thoroughly, confirm resource availability, consider transition costs, do the math.
F. TCO Estimator is intended as:
a. A good analytical tool for the $100,000 Buy decision
b. A place to start and a great list of costs to consider for the $10M Buy decision or the $100M Make, new facility, decision.
Harry C. Moser
Founder and President
Office +01 847 726 2975