Total cost of ownership example: a 3-year offshore vs domestic supplier comparison

Fictional exampleExample Lighting Co., Suppliers X and Y and every price, rate and duty below are made up. The 4% duty is fictional. This page covers purchased parts (supplier TCO), not car or software TCO. Don't paste real NDA pricing into an AI tool; see the data-safety checklist.

Total cost of ownership is what a part will cost you to own over a decision period. A should-cost model asks what it should cost to make—see the should-cost model example. To put mismatched quotes on the same basis first (Incoterms, currency, MOQ), see the RFQ bid comparison example; this page starts where that one stops.

What does total cost of ownership include in procurement?

Optional extras: payment-terms cash cost, currency risk, IP risk. The Reshoring Initiative's free TCO Estimator covers 30 cost and risk factors; use as many lines as your decision needs.

What's the TCO formula?

TCO = (per-unit recurring costs × annual volume × years) + one-time costs. Then TCO per unit = TCO ÷ total units over the horizon. Always state the horizon—one-time costs look three times bigger over one year than over three.

Worked example: a die-cast housing, 20,000 a year for 3 years

Example Lighting Co. chooses a source for a die-cast housing: 20,000 pcs/yr for 3 years (60,000 pcs). Carrying rate 25%/yr (the same fictional rate as the RFQ page). Cost per defective unit reaching the line: $20.

Result: Supplier X's price is $1.40 (17.5%) lower, but Supplier Y's 3-year TCO is $13,363 lower. Price is the biggest line; the decision is made in the smaller ones (weeks of stock, defects, tooling).

The Reshoring Initiative states that price-only decisions often result "in a 20 to 30 percent miscalculation of actual offshoring costs" (their claim, not a measured statistic from this site). The example above is one way that gap shows up.

What would change the answer?

At a 0% duty, Supplier X's 3-year TCO falls to about $605,135 and it wins by roughly $7,130. The break-even duty is about 1.4% of the $8.00 price. The decision sits close to the line—check the real duty rate before you decide, and recheck when tariffs change (see #tariffs). Lead time and defect rate move the answer the same way: feed them from your supplier scorecard, not from a guess.

Do it with AI

You are a sourcing analyst. Compare these suppliers on total cost of ownership over [3] years at [20,000] units/year. For each supplier I'll give: price, freight, duty rate, brokerage, transit weeks, safety-stock weeks, defect rate, cost per defect, supplier-management cost per unit, and one-time costs [PASTE]. Use carrying rate [25%]. Calculate landed cost, carrying cost (landed × weeks ÷ 52 × rate), quality cost, recurring cost per unit, 3-year TCO and TCO per unit. Show every formula and number in a table. Then find the duty rate, defect rate or transit time at which the ranking flips. Don't look up or invent duty rates; use only the rates I give and list anything missing.

What to check: get the duty rate from your broker or the HTS for the actual HS code and origin; confirm the carrying rate with Finance; check the defect rate against scorecard data; recompute one column by hand.

Free template

Download the TCO template (CSV), pre-filled with the fictional X vs Y example. Landed, carrying, quality, recurring, TCO and TCO/unit are formulas. For a longer factor list, the Reshoring Initiative also offers a free online estimator (account required).