Loom & Larch: Nearshoring, Carbon and Total Cost of Ownership
Loom & Larch sells 200,000 outdoor jackets a year. Its offshore supplier quotes $18.00 FOB, plus $1.10 ocean freight and insurance and 12% import duty on FOB; the pipeline is 90 days including port congestion, 12% of units are marked down at an average loss of $12, air-freight expediting averages $1.10 a unit, and rework and returns cost $0.55 a unit. Emissions are 4.8 kg CO2e a unit. A nearshore supplier quotes $23.50 FOB with $0.60 freight, no duty, a 25-day pipeline, 3% markdowns at the same average loss, $0.25 expediting and $0.15 rework, and 1.2 kg CO2e a unit, but requires a three-year commitment for at least 150,000 units a year and can supply no more than 150,000. Loom & Larch holds inventory at 18% a year of landed cost and applies an internal carbon price of $50 a tonne. A retail customer representing 35% of volume will require regional sourcing from 2027. The offshore price is fixed for 12 months, then renegotiable, with a 7% increase expected.
1. Build a total cost of ownership comparison per unit and per year for the two sources.
Read the worked answer
Inventory carrying cost = landed cost × 18% × pipeline days ÷ 365. Carbon = kg CO2e × $50 ÷ 1,000.
| Cost element | Offshore | Nearshore |
|---|---|---|
| FOB price | 18.00 | 23.50 |
| Freight and insurance | 1.10 | 0.60 |
| Import duty (12% of FOB) | 2.16 | 0.00 |
| Landed cost | 21.26 | 24.10 |
| Inventory carrying (90 vs 25 days) | 21.26 × 0.18 × 90/365 = 0.94 | 24.10 × 0.18 × 25/365 = 0.30 |
| Carbon at $50/t | 4.8 × 0.05 = 0.24 | 1.2 × 0.05 = 0.06 |
| Markdowns (12% vs 3% × $12) | 1.44 | 0.36 |
| Expediting (air freight) | 1.10 | 0.25 |
| Rework and returns | 0.55 | 0.15 |
| Total cost of ownership per unit | 25.53 | 25.22 |
Annualised at 200,000 units: offshore $5,106,000; nearshore $5,044,000 - a difference of $62,000, or 1.2%, in favour of nearshore.
The headline purchase price gap is $5.50 a unit ($23.50 vs $18.00), yet the true gap after duty, inventory, markdowns, expediting, rework and carbon is $0.31. That reversal is the point of the exercise: a sourcing decision made on FOB price alone would be made on roughly 6% of the real cost difference.
2. Recommend a sourcing structure. Use the constraints and a sensitivity analysis to support your recommendation.
Read the worked answer
The quantified gap is too small to decide on its own, so decide on risk-adjusted total cost and on constraints:
- Nearshore is capped at 150,000 units; 50,000 must therefore stay offshore in the short term.
- The 35% retail customer needs at least 70,000 units from regional sourcing, which 150,000 nearshore units comfortably covers.
- The nearshore three-year commitment is a real liability: if volumes fall, Loom & Larch pays for capacity it does not use. Model the downside at, say, 170,000 total units before signing.
Sensitivities that move the answer decisively towards nearshore:
- The expected 7% offshore price increase adds $1.26 a unit (plus duty and freight effects), taking offshore to about $26.90.
- A carbon price of $100/t adds $0.24 to offshore and $0.06 to nearshore, widening nearshore's advantage.
- A markdown rate of 20% offshore, plausible in a volatile season, adds $0.96 to offshore.
Recommendation: dual-source - 150,000 units nearshore, 50,000 offshore for 12 months - and use the near-term offshore volume to retain competitive tension and to test whether nearshore quality and delivery hold. Qualify a second regional supplier to break the 150,000 cap and to avoid a single-source dependency. Re-run the model at each renewal, and treat the offshore contract as a 12-month bridge given the renegotiation clause.
The judgement: nearshore wins not because it is $0.31 cheaper, but because it removes duty and long-pipeline exposure, cuts Scope 3 emissions by about 540 tonnes, satisfies a customer condition that protects 35% of revenue, and shortens the response time to demand shifts - and it wins on cost too once any one of the sensitivities moves.
3. How should Loom & Larch embed this analysis in procurement targets and sustainability reporting so the behaviour sticks?
Read the worked answer
Change the procurement KPI from price paid to total cost of ownership per unit delivered, covering FOB, freight, duty, markdowns, expediting, rework, inventory carrying and carbon. A buyer rewarded on FOB price will reproduce exactly the behaviour the analysis is designed to stop.
Make the internal carbon price visible and reviewed annually. Publish the shadow price, escalate it on a stated trajectory, and show carbon as a line in the sourcing model so it is contested openly rather than buried in a policy document.
Report Scope 3 emissions with the same rigour as cost. Disclose supplier-level emissions, the methodology and the assurance provider, because the 2027 customer requirement and eventual mandatory climate reporting will both test the numbers. A claim that cannot be evidenced is a reputational liability.
Add non-financial supplier metrics to the scorecard: on-time-in-full, lead-time variability, defect rate and audit findings. The nearshore case rests partly on these.
Put the multi-year commitment under an investment-style approval. A three-year take-or-pay is a capital-like commitment; test it against a downside volume scenario and disclose the exit cost.
Report the decision's outcomes to the board - realised savings, markdown reduction, emission reduction - so the sourcing strategy is evaluated on the same total cost basis on which it was approved, and adjust the model when the assumptions prove wrong.