Supply Chain · Total Cost of Ownership

Nearshoring TCO: why unit price comparisons produce the wrong sourcing decision

Unit price makes offshore look cheaper. TCO makes nearshore win by 3–15%. Four cost categories never appear on supplier quotes — but they appear on your P&L. The gap between landed cost and total cost is where sourcing errors live.

60%

Companies that offshore based on landed cost or unit price alone

Like buying a car by comparing sticker prices, ignoring fuel, repairs, and insurance

25%

Offshore-sourced products more profitable reshored with correct TCO

1 in 4 sourcing decisions is wrong — even before counting tariffs

3.6%

TCO savings: nearshore $1.07/unit vs Asia $1.11/unit (real case)

$0.10 unit price advantage in Asia flipped to $0.04 loss with full TCO

The comparison most procurement teams get wrong

Common Practice

Landed cost comparison — unit price + freight + duty. 60% of companies stop here.

Captures ~4 line items out of 8 real cost categories

Like comparing rent prices while ignoring commute time, utilities, and parking

Correct Approach

Total cost of ownership adds inventory carrying, quality overhead, disruption risk, and coordination cost.

Captures all 8 categories — reveals nearshore advantage of 3–15% per unit

The real price of a product includes everything between the supplier's dock and your production line

Four costs never on the supplier quote — but always on the P&L

Inventory carrying cost (20-30% annually). Offshore sourcing with 4–8 week lead times forces safety stock nearshore suppliers don't require. A $6M inventory cut by 30% saves $1.5–1.8M/year.

Quality & compliance overhead. Distance magnifies defects. A rejected batch from Asia means 4–6 week replacement vs 2–3 days nearshore. The downtime cost — overtime, premium freight, rescheduled production — compounds every incident.

Operational coordination. Quality audits, travel, time zone delays, project management. One medical device case allocated $80K/year to offshore quality oversight alone — none of it on the supplier invoice.

Disruption risk premium. McKinsey data: supply chain disruptions cost ~4.5% of annual profit. A 5% annual disruption probability on $2.25M spend = $112,500/year risk provision for offshore. Nearshore cuts that probability materially.

Practical next steps

Audit your last 3 offshore sourcing decisions. Pull the spreadsheets. Count which cost categories beyond landed cost were included. If the answer is zero, run a retrospective TCO on the largest category.

Add explicit disruption premiums to every model. Start with 5% annual probability. Adjust by category criticality and supplier geography. Debating the number is fine. Having no number costs more.

Share the TCO model with finance before the sourcing review. A TCO that finance validates carries weight with the CFO. A unit-price comparison the CPO defends alone does not.

Jargon Decoder

TCO Total Cost of Ownership — the full cost of buying and using something, like a car's total cost including fuel, insurance, and repairs.

Landed Cost Unit price + freight + insurance + duties. The sticker price. What most comparisons use.

Inventory Carrying Cost The cost of holding stock — warehouse space, insurance, money tied up. Typically 20–30% of inventory value per year.

Disruption Risk Premium Money set aside for supply shocks — port closures, tariffs, supplier failures. Like insurance you price into the sourcing decision.

FOB / DDP FOB = seller pays until goods are on the ship. DDP = seller pays all the way to your door. DDP includes freight and duty in the quoted price.

Nearshoring Moving production to a nearby country (e.g., Mexico for US buyers) instead of a distant low-cost country. Cuts lead times from weeks to days.

Sources: Umbrex TCO in Procurement; ThomasNet TCO Offshoring vs Reshoring; PISA Medical Device TCO Framework; Industrial Automation Co. 2025 Sourcing Cost Analysis; McKinsey Supply Chain Disruption Research; Trace Consultants Reshoring Cost Analysis

Rzzro

Procurement, quantified.