Calculating medical manufacturing TCO (Total Cost of Ownership) instead of unit price is crucial because TCO encompasses all expenses over a product’s entire life cycle. On the contrary, the unit price only covers the initial acquisition cost or “sticker” price.
The unit price may only amount to 20-25% of the TCO. On the contrary, the latter one can provide a holistic view, incorporating acquisition, operation, maintenance, training, compliance, and disposal costs over a product’s life cycle.
Medical Manufacturing TCO: Why Unit Price is a Deceptive Metric in MedTech Procurement
Medical manufacturing TCO is better in MedTech procurement because focusing solely on a low unit price often masks a significantly higher TCO. While manufacturers in regions like Asia may offer really low prices per part, these savings are frequently eroded by hidden expenses in logistics and quality management.
A low unit price in Asia can be a deceptive metric because it often hides significant additional costs related to logistics, quality oversight, and regulatory compliance that accrue over the product life cycle. The primary factors that make the “sticker price” of a part misleading are:
- Logistics and Supply Chain Costs. Shipping from Asia is complex and expensive. It is a process that involves international freight, border and customs clearance, trade tariffs, and long lead times and costs.
- Higher inventory levels are often required to mitigate supply chain disruptions, tying up significant capital.
- Quality assurance. Guaranteeing that the medical manufacturing standards are met also comes at a cost. Often, it will involve hiring auditors to perform inspections at the manufacturing site, paying for third-party inspections, and taking in recalls or rework for underperforming devices.
- Regulatory Compliance. In the same way, complying with all regulations can be an expensive endeavor. Tasks like managing documentation and handling audits can add considerable overhead that is not reflected in the initial part price.
- Communication and Time Delays. Doing business with international partners will carry the elements of very diverse time zones, cultural differences, and the language barrier. These are factors that must be foreseen, as they can add to the monetary and timely costs.
- Total Cost of Ownership. When considering the Total Cost of Ownership (TCO), the hidden costs often outweigh the initial per-part savings. For this reason, calculating the TCO instead of the unit price will provide a real idea of the cost of a device from the stage of design and procurement to disposal.
By focusing solely on the unit price, companies underestimate the true financial burden and risk exposure, making what initially appears to be a cost-effective decision a far more expensive long-term proposition
Calculating the Landed Cost and Supply Chain Overhead
Calculating landed cost involves summing the product’s unit cost with hidden expenses like international freight, customs duties (including potentially high Section 301 tariffs), brokerage fees, insurance, and overhead, revealing true profitability beyond the initial price.
These costs add significant percentages (25%+ for tariffs) and impact margins heavily, with long lead times adding to carrying costs and risk. Some of those hidden expenses are:
- International Freight. Ocean/air freight, fuel surcharges (BAF), origin/destination fees, and drayage (port-to-warehouse).
- Customs and Tariffs. Taxes based on HS Code, plus specific tariffs (like Section 301 for China), can add percentages between 7.5% and 25%+, increasing Cost Of Goods Sold (COGS).
- Customs Brokerage Fees. Charges for brokers handling documentation and clearance.
- Insurance. Protecting merchandise in transit.
- Bank/Payment Fees. Currency conversion, payment processing.
- Port/Terminal Fees. Handling, storage, etc. (THC).
- Inspection/Quality Control. Costs for verifying product quality.
- Storage. The price for storage of products increases the overall costs, especially if they’re tied up with long lead times.
For this reason, accurately calculating the landed price can help prevent profit margin reduction. By doing so, it can also help create pricing strategies that are profitable, especially in the middle of continuous tariff changes and lengthy global logistics.
A common formula for calculating landed cost is as follows: Landed Cost = Product Cost + Freight + Insurance + Duties/Taxes + Broker Fees + Other Overhead.
Strategic Advantages of Medical Device Contract Manufacturing in Mexico
Medical manufacturing TCO can greatly benefit from contract manufacturing in Mexico, as it offers high cost & efficiency gains because of proximity. Because of this, the need for safety stock diminishes thanks to shorter and more reliable lead times. In the same way, TCO is reduced through decreased freight, tariffs, and inventory.
This nearshoring strategy builds resilient, cost-effective supply chains with lower risk, boosting competitive pricing and market agility:
- Reduced Safety Stock. Shorter, more predictable supply chains mean less uncertainty, allowing companies to hold less buffer inventory (safety stock) to guard against disruptions, directly lowering warehousing and carrying costs.
- Lower Transportation Costs. Being close to the large U.S. market cuts significant international shipping expenses, tariffs, and customs complexities.
- Faster Response & Inventory Turnover. Nearshoring enables a more agile, Just-in-Time (JIT) model, improving responsiveness to market shifts and reducing capital tied up in inventory.
- Streamlined Logistics. Reduced lead times and simpler logistics decrease hidden costs associated with managing complex international supply chains, notes General Assembly & Manufacturing.
Medical manufacturing TCO benefits for contracting in Mexico
In addition, there are some broader benefits for contracting in Mexico:
- Cost Competitiveness. Lower labor costs,skilled workforce, and favorable trade agreements (like USMCA/NAFTA) significantly reduce overall manufacturing expenses.
- Quality & Expertise. Mexico boasts established expertise and high-quality production in medical devices, aerospace, and electronics.
- Market Access. Strategic location provides excellent tariff-free access to the U.S. and other global markets.
- Supply Chain Resilience. Diversifying manufacturing to Mexico mitigates risks associated with distant suppliers, enhancing supply chain security.
In sum, the benefits of contracting medical device manufacturing in Mexico can represent several advantages. If you would like to explore even further, the following article can provide more in-depth insight into the topic. To reduce costs, partner with RexMed Health and optimize your manufacturing processes today. Contact us!
