4Strategic costs: There are many factors that could fall under this category. The following are just
two examples of how sourcing decisions can affect
product strategy and value.
a. Impact on innovation. U.S. companies in particu-
lar are frequently urged to outsource most of their
manufacturing offshore and focus on innovation and
marketing. However, separating manufacturing from
engineering degrades the innovative effectiveness of
both a company and its home country, according to
Harvard Business School (HBS) professors Gary
Pisano and Willy Shih. 7 Similarly HBS’s Michael
Porter has discussed the advantage for innovation of
“clustering”—having suppliers, research universities,
manufacturing, and others involved in product devel-
opment and production located near each other.
b. Impact on product differentiation and mass cus-
tomization. Many companies in developed economies
are shifting their focus from commodities to differen-
tiated products. They often do this through mass cus-
tomization, producing small quantities of products
that conform to the specific desires of the market but
at costs approaching those of mass production. It is
easier and less costly to make the move to mass cus-
tomization with short, tightly clustered supply chains.
5Environment: This is the most subjective catego- ry. In principle, for each product source, a company should measure the “cleanliness” of the electricity
generation at each location, pollution from the production process, the carbon footprint of its shipping
operations, the requirements for local warehousing,
how it disposes of obsolete inventory, and other activities that affect the environmental impact of its supply
chain. Once the “green” impact has been quantified for
each source, the next step is to apply a dollar value to
that impact. A common measure is the cost per ton of
carbon dioxide (CO2) produced. Whether to assign
“green” costs and at what rate clearly is a corporate
policy decision.
TCO APPLIES EVERYWHERE
This article has mostly focused on the United States,
but the total cost of ownership concept and methodology can help companies in any country understand
and quantify the value of local sourcing.
For many products, the base price of those sourced
in low-labor-cost countries will almost always be lower
than the price for the same product manufactured in
higher-labor-cost locations. When companies focus
only on price and labor, they downgrade all other pri-
orities. Companies that employ TCO, however, usual-
ly find that almost all of the other costs would favor
production close to the end customer.
Notes:
1. James Benes, “Made in USA: Returning Home,”
American Machinist, July 16, 2009 ( http://www.ameri
canmachinist.com/304/Issue/Article/False/84568/
Issue).
2. Accenture, Manufacturing’s Secret Shift: Gaining
Competitive Advantage by Getting Closer to the
Customer, March 2011 ( http://www.accenture.com/
us-en/Pages/insight-manufacturings-secret-shift-
gaining-competitive-advantage-summary.aspx).
3. Simon Ellis, “Top 10 Supply Chain Predictions for
2011,” Material Handling & Logistics, February 2, 2011
( http://mhlnews.com/global/top-supply-chain-pre-
dictions-0202/ index.html).
4. The Boston Consulting Group, Made in America
Again: Why Manufacturing Will Return to the U.S., July 5,
2011 ( http://www.bcg.com/documents/file84471.pdf).
5. Accenture, March 2011.
6. “Knock-offs catch on,” The Economist, March 4,
2010 ( www.economist.com/node/15610089).
7. Roger Thompson, “Why Manufacturing Matters,”
Working Knowledge newsletter, Harvard Business
School, March 28, 2011 ( http://hbswk.hbs.edu/
item/ 6664.html).
