Use Total Cost of Ownership in Offshore Sourcing

I am a fan of the total cost of ownership (TCO) model. Simply put, it is an assessment of all costs, both direct and indirect, that are involved with an item over its life. While many of the cost elements are estimated, you can build a pretty accurate forward looking cost model based on experience or current cost forecasts. The key is to be aware of all associated costs of a purchase.

A good example of TCO would be the purchase of an automobile. Let’s say you buy a new Ford Explorer later today at a Ford dealer. Let’s also assume that you are going to keep the car for five years, the length of the loan that you were able to get. You’d need to add in the cost of loan interest, as well as sales tax and registration fees.

Assume also some level of quarterly preventive maintenance for the first year or so, and then the cost of typical repairs including tires, brakes, and other consumable items. Add in fuel, insurance and depreciation and then you can begin to calculate the total cost of ownership. So, that new SUV that you purchased for $32,000 today new may cost you $75,000 after the five years. This doesn’t make it a bad purchase at all. But as a savvy car buyer you know there is more to the purchase than the sticker price. The same goes for no matter what you buy.

There are many excellent reasons to source internationally but often some of the tangential costs are a surprise to many. When calculating the TCO for international purchases, keep in mind some of these types of costs: