Harry Moser was frustrated. He had spent his entire career in domestic manufacturing, including over 4 decades selling machine tools and foundry equipment. He had anxiously watched the slow, steady stream of offshored U.S. manufacturing jobs become a tsunami as the new millennium dawned and decided he’d seen enough of it. In the mid 2000’s, as president and then chairman of +GF+ Machining Solutions, Moser lobbied the Association for Manufacturing Technology, the National Tooling and Machining Association and the Precision Metalforming Association to join forces to support reshoring efforts that would ensure the future sales and use of U.S. made machine tools.
Transitioning out of his role with +GF+, he began making presentations and writing articles on how to beat Chinese competition in the U.S. market. Having read the canon on the hidden costs of importing, he noted that almost every writer mentioned the hidden costs that many procurement departments ignore when comparing the cost of an imported part to a domestically made part, and that they all stressed that buyers should make purchasing decisions based on what is called the “total cost of ownership.” However, not one writer offered a spreadsheet that would allow a purchasing manager to actually calculate it. It was surprising to Moser that a profession that so values accurate numbers did not have a simple tool to accurately calculate the true cost of ownership so that a comparison could be made between the cost of buying or making an import vs. the cost of buying or making a domestic part. He decided to change that.
In 2010, Moser founded the Reshoring Initiative with a mission of bringing good, well-paying manufacturing jobs back to the U.S. by assisting companies to more accurately assess their total cost of offshoring and shift collective thinking from “offshoring is cheaper” to “domestic reduces the total cost of ownership.” Job One for Moser was to delve back into all the articles he had read and list the myriad costs, risks and strategic impacts that affect total cost of ownership. He then wrote software that would assign dollar values to each item on the list and had the software critiqued by colleagues from across the country, most notably by his contacts at the Association for Manufacturing Excellence.
That software became the Total Cost of Ownership Estimator, which now resides on the Reshoring Initiative website, and can be used at no charge by any purchasing department interested in calculating the true cost of importing. Since the site was launched, the Estimator has been used over 1,500 times.
The Total Cost of Ownership Estimator is an excellent tool to help one better understand the difference between the price of something and its total cost. The price of an item is the amount of money that exchanges hands for the item. It’s simple. The price of the widget is $2.00 so I give the cashier $2.00. The total cost of an item is fully loaded with other factors that determine whether the purchase is actually a good value.
For B2B buyers, this comparison can be particularly critical. In determining the total cost of ownership, B2B buyers must weigh not only the price of a widget, but also such factors as:
- The minimum order size (If you are forced to order a higher amount, then negative cash cycle ramifications must be added into the total cost)
- Length of time until delivery (If it takes a long time before you receive the product, then you need to order higher amounts – which costs more – to prevent an out of stock situation)
- Ease of communication with the source (If poor communication issues due to either time zone differences or language problems cause your employees to constantly call or e-mail the vendor, the additional cost of the employee’s time must also be considered)
- Poor quality (If you reject parts and/or replace defective product made from those parts then the cost of this waste must also be added in to arrive at the total cost)
- Supply chain disruption risk (e.g., political instability in the overseas manufacturer’s country or strikes at shipping ports)
As the pricing gap narrows between imports and domestically made products and parts, calculating the total cost of ownership becomes ever more critical. Even the Commerce Department has recognized the importance of the total cost of ownership approach to measuring the speed and effectiveness of supply chain partners. Their March 2015 report titled “Supply Chain Innovation: Strengthening America’s Small Manufacturers” notes that when a manufacturer uses a total cost of ownership approach to sourcing – instead of simply buying from the supplier with the lowest per piece cost – the additional costs of added shipping time, risk of inventory being damaged during transport, and interruptions of the supply chain become more readily apparent.
B2B buyers can play a role in the renaissance of U.S. manufacturing by simply breaking the habit of automatically buying from overseas and redoing the math on whether importing parts – or moving manufacturing overseas – is the cost effective investment decision. U.S. manufacturers of B2B parts don’t want handouts; they simply want a level playing field. By taking a close look at the total cost instead of the price per piece, U.S. B2B buyers can level that playing field.