Supplier total cost of ownership
The cheaper unit price is not always the cheaper supplier. Compare two suppliers once inventory, lead time, payment terms and quality are counted.
What is counted
- Purchases: annual units × (unit price + freight and duty).
- Carrying cost: average inventory × landed cost × your carrying rate. Average inventory is half an order plus safety stock. A higher MOQ or a longer lead time means more stock.
- Cost of paying early: the cash you hand over before the goods arrive, for the days you hand it over, at your cost of capital.
- Cost of defects: defective units × (landed cost + handling).
What is not counted
Supply risk, communication, flexibility on changes and your team's time. These are real but hard to price. If the totals are close, they should decide it.
For the background, read Landed cost vs total cost of ownership and Strategic sourcing and supply risk.
Frequently asked questions
What is total cost of ownership in sourcing?
The full annual cost of buying from a supplier: purchase price and freight, plus the inventory, cash and quality costs that come with their lead time, MOQ, payment terms and defect rate.
What inventory carrying cost should I use?
15 to 25% a year is common for consumer goods. It covers storage, insurance, shrink and obsolescence. Cost of capital is entered separately.
Is nearshoring worth a higher unit price?
Often, for fast-moving SKUs. Shorter lead times cut safety stock and order sizes, and you pay closer to when you sell. This calculator shows whether it covers the price gap.
Is my data stored?
No. The calculation runs in your browser. Nothing is sent anywhere unless you choose to download the spreadsheet, in which case only your email address and the headline result are sent to us.