Global sourcing often has hidden costs
By Kate Hill, for SBT
Given the intense pricing pressure from offshore competitors, Wisconsin manufacturers need to include an unbiased evaluation of offshore suppliers in their strategic plans.
Waiting for changes in US trade policy or exchange rates to level the playing field appears to be a risky approach to an immediate and serious business issue.
Before using global sourcing as a quick fix, however, companies need to consider some of the more frequently overlooked cost components of offshore sourcing.
Failure to understand those costs can offset and even reverse any potential savings.
Because most of those costs get buried in hard-to-extract indirect or overhead budget items, the checklist below will help companies identify and include the hidden costs in their return-on-investment projections.
Likewise, companies bidding against offshore competitors can use it to show customers a more realistic cost comparison between bids.
1. Overseas travel costs – Overseas visits are recommended to get acquainted with suppliers, their countries and culture, and the region’s real business and governmental conditions. Return visits to maintain those ties may also be required.
2. Working capital costs – Payments for international goods are generally made through a letter of credit. That requires funds on deposit at a bank with payments made at or before shipment. Company cash can be tied up for weeks or months.
3. Third-party services – Fees for representatives experienced with offshore suppliers, on-site inspection and control and freight forwarding need to be considered.
4. Damage and scrap – If shipment damage or quality defects occur, returning goods to offshore suppliers may be uneconomical. Instead, additional investments in packing and insurance may be required.
5. Longer lead times – Small parts and quantities can be air freighted, but most shipments will require longer lead-times. To minimize inventory-carrying costs, more accurate forecasting is required to manage larger order quantities. Just-in-time scheduling becomes much more difficult.
6. Time to market – Modern communications have reduced language and distance barriers, but these can still slow down new product design cycles and increase any associated opportunity costs.
7. Quality assurance – If controls on supplier quality fail, the use of inferior materials could lead to premature product failure, higher warranty costs and potential legal liabilities.
8. Intellectual capital risk – The cost of developing defendable international contracts protecting intellectual capital needs to be included.
9. Market share risk – An offshore supplier could eventually become a direct competitor in the US market or abroad.
10. Bribery – Bribery is decreasing, but is still commonplace in some regions. Those costs are usually buried in intermediary fees.
For better or worse, the world is getting smaller through trade agreements, international travel and global communications. Understanding offshore costing can help manufacturers find new strategies to win in a competitive global economy.
In the end, the cost of ignoring the subject may prove to be the highest and most fatal hidden cost of all.
Kate Hill is president of Heartland Information Research, Milwaukee.
March 7, 2003 Small Business Times, Milwaukee
