Executive Briefings

Total Acquisition Cost Tool May Show Savings from In-shoring Overstated

Original equipment manufacturer sourcing decisions are typically based on total acquisition cost (TAC) formula comparisons. Because of this, such tools play a primary role in decisions about whether to purchase from domestic or overseas sources. TAC formulas attempt to take into account all cost factors related to buying from a particular source.

There is no standard industry TAC tool. Instead, OEMs tend to create and use their own in-house, home-brewed TAC formulas and because of this there are a myriad of variations. Some are fairly straightforward, focusing on basic elements typically associated with supply chain costs such as piece price, transportation, packaging, tariffs, etc. Others can reach staggering levels of complexity, including lesser-used cost elements such as currency exchange rate variation risk, bondage (which ensures payment to suppliers), extended ownership exposure (FOB for overseas suppliers is often at the exporting port), etc.

Most arguments advocating in-shoring are based on the proposition that if a complete job is done identifying and quantifying TAC formula supply chain cost elements, these tools will show that the competitive advantage of foreign sources is dramatically overstated. At first glance this seems like a good approach. After all, using a TAC formula-based argument communicates in a language that OEM purchasing personnel should understand. Unfortunately, experience shows that this approach is marginally effective.

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There is no standard industry TAC tool. Instead, OEMs tend to create and use their own in-house, home-brewed TAC formulas and because of this there are a myriad of variations. Some are fairly straightforward, focusing on basic elements typically associated with supply chain costs such as piece price, transportation, packaging, tariffs, etc. Others can reach staggering levels of complexity, including lesser-used cost elements such as currency exchange rate variation risk, bondage (which ensures payment to suppliers), extended ownership exposure (FOB for overseas suppliers is often at the exporting port), etc.

Most arguments advocating in-shoring are based on the proposition that if a complete job is done identifying and quantifying TAC formula supply chain cost elements, these tools will show that the competitive advantage of foreign sources is dramatically overstated. At first glance this seems like a good approach. After all, using a TAC formula-based argument communicates in a language that OEM purchasing personnel should understand. Unfortunately, experience shows that this approach is marginally effective.

Read Full Article