In a Heart Beat, TCO Is Almost Always Cheaper Closer to Home

The next time you calculate the total cost of ownership (TCO) for a program you could source at various sites, remember the curve of your heart beat.Most OEM executives think bathtub curve, not heart beat curve. They estimate high costs at startup and high costs at shutdown, but figure - erroneously - that in between is a flat line. In fact, costs periodically spike through the life of an outsourcing program, creating a curve that resembles a heart beat.

Why does this matter? Because most OEMs do not estimate an accurate TCO for programs they ship to China and other distant cheap labor locales. If they did, they’d be more likely to source those programs closer to home, in Mexico or Eastern Europe.

Any outsourcing program has more costly interventions and initiatives - the spikes in the heart beat curve - than most OEMs think. Based on my research into more than 100 projects, I can say with some certainty that interventions and initiatives will often add up to more than total startup costs, but are overlooked or ignored in sourcing decisions.

An intervention is anything that requires you to send staff to fix: delivery problems, quality problems and engineering problems due to obsolete parts to name just three. Initiatives are those periodic enterprise efforts to improve things, like Six Sigma or ROHS. In electronics, there’s always some new initiative. Yet, these too are rarely considered in TCO.

OEMs need to install accounting procedures that do a better job of tracking the cost of interventions and initiatives so they have a baseline of data from which to make estimates when they calculate comparative TCOs. (For more measurement, take a look at the item on proactive metric management on the Kinaxis Web site.) They could also get some help from our Outsourcing Navigator process.

When it comes to interventions and initiatives, closer is always cheaper. So remember your heart beat — it might save you from having a heart attack over how much you actually spent. Comments, please! And don’t forget to sign up for the June 13th Chicago Outsourcing Navigator Workshop.

Posted by Bill Roberts, April 27th, 2007