Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Onshoring to Cut Costs 26 Percent
Transcript
- Lucas: A procurement director at a medical-device company in the Midwest called me last year with a problem. He was buying electronic components from a supplier in Thailand for $0.89 a piece, and his CFO wanted to know why he was paying $1.21 to a supplier in Ohio for the same part. Luna: Right, because on paper the Ohio option is 36 percent more expensive. That's a hard conversation to have. Lucas: Exactly. But the director had been tracking total cost of ownership for two years. He knew the $0.89 part came with $0.22 of ocean freight, $0.08 of customs brokerage, and a buffer stock carrying cost that added another $0.11. Plus, every time he needed an urgent air shipment, that was $0.45 extra per unit. Luna: So the true landed cost on the Thai part was closer to $1.75? That's already above the Ohio price. Lucas: He calculated $1.63 — still above the $1.21 sticker from Ohio. But he also factored in the soft costs: the travel to Bangkok twice a year, the time spent managing a 14-hour time-zone difference, the quality rejects that took six weeks to replace. When he added all of that, the Thai supplier's total cost hit $1.87 per unit. Luna: So the Ohio part actually saves $0.66 per unit — a 35 percent reduction. Did he go with the Ohio supplier right away? Lucas: He did, but not without a negotiation. The Ohio supplier had quoted $1.21 for a one-year contract. The director said, 'I'll commit to three years and all my volume — about 120,000 units a year — if you get to $1.13.' They landed at $1.15, which brought the per-unit cost down another 5 percent. Over three years, the total savings hit 26 percent. Luna: That's a powerful number. But I'm wondering about the risk side. When you concentrate all your volume on a single domestic supplier, you lose the geographic diversification that offshore sourcing gives you. Lucas: That's exactly the catch. And the director learned it the hard way. In February of this year, a snowstorm shut down the Ohio plant for a week. He had no backup. The Thai supplier could have stepped in, but he had terminated that relationship six months earlier. Luna: Ouch. So what was the cost of that week? Lucas: About $300,000 in lost production and premium freight to rush parts from a distributor. That wiped out nearly half of his annual savings in one week. So he went back and built a plan: keep the Ohio supplier as primary, but qualify a second supplier in Texas to carry about 20 percent of volume as a rotating backup. Luna: So the lesson is: onshoring saves money, but you need geographic redundancy within your domestic network. Don't put all your eggs in one state. Lucas: Exactly. The Texas supplier is at $1.23 per unit — slightly higher than Ohio's $1.15 — but the total cost of that dual-source strategy is still 24 percent below the old Thai landed cost. And now they have a plan for weather events, freight strikes, anything regional. Luna: That makes a strong business case. If today's conversation was useful to you — maybe you're considering a similar move — these conversations stay ad-free because of listener support. You can find us at buy me a coffee dot com slash fexingo. It's a simple way to keep this going. Lucas: Yeah, we appreciate that. So the director is now presenting his dual-source onshore model to other plants in his company. The total addressable savings across five facilities is about $2.3 million a year. And the CFO finally understands why $0.89 isn't always cheap. Luna: That's a great outcome. One last question: what's the threshold where onshoring stops making sense? At what price differential does it flip back to offshore? Lucas: Good question. In his total-cost model, the break-even point was a 42 percent premium on the domestic price. As long as the Ohio supplier stayed under $1.27, it was still cheaper than Thailand. That's a useful benchmark for anyone doing their own analysis. Luna: So the tool is the model, not the price tag. Run your own numbers with all the hidden layers. Lucas: Right. And then add a risk buffer. The snowstorm taught him that.