Rising wages abroad are a driving force behind more than a trend where a third of large U.S. manufacturers are considering whether to return production to the United States, according to The Boston Consulting Group. That shift in thinking, though, is not solely the result of rising wages in China and other countries, but also of increasing awareness about the total cost of doing business offshore.
For many companies that source from offshore locations, the initial appeal of lower labor costs (particularly in the labor-intensive manufacturing sector) can create blinders to hidden costs that often are not considered in day-to-day sourcing within North America. If you are contemplating an offshore source, consider the following factors.
Hidden Logistical Costs
In general, flying across the United States isn’t nearly as complex or costly as flying into or out of another country. The need for a passport and often a visa, arranging out-of-country insurance, customs delays, and often long flights all add up to significant extra preparation and time.
Using offshore sources entails analogous costs and delays that often are not taken into account when compiling a business case for such strategies. Even experienced supply-chain professionals may be unaware of the potential risks. Determining total costs requires consideration of all aspects of the movement of goods, from the obvious such as forwarding costs, customs, duties, and insurance, to the less-obvious like accounting for labor disruption, fuel-price volatility, expediting costs, and customs inspection.
More Inventory than Expected
When traveling, I like to stop by the duty-free shop to stock up on low-cost items. Then I have to find the space at home to store them. When I’m not traveling and thus am patronizing local stores, I’m supporting the local economy but paying significantly more for the same goods.
Managing inventory from offshore sources involves a similar thought process. It may seem like a simple trade-off when the material cost savings are considered; however, the levels of inventory needed to support offshore sources almost always creep higher than originally expected. Fluctuating customer demands, unplanned supplier delays, unexpected weather, and customs seizure all have an impact on planned lead times, which means inventory may then be increased to compensate for more such occurrences in the future. When planning to use offshore sources, add at least 25% to expected inventory levels to properly account for the unexpected.
Let’s set aside for a moment the common perception that goods sourced from offshore companies are of lower quality. Sometimes that is valid, other times not. What’s important to understand is that the additional distance will reduce your ability to rapidly resolve quality concerns and most likely result in additional costs. To retain customer confidence and maintain continuity of supply, quality concerns must be dealt with rapidly (just ask Mattel).
Offshore sources can create obstacles to achieving those objectives that must be accounted for relative to process and cost. Some examples include:
- Communication. Barriers in language and culture are two of the most significant. In addition, however, varying time zones can cause significant delays in communication that only serve to increase risk.
- Logistics complexity. The ability to quickly identify the location of all affected goods and quarantine in order to cease any further risk of impact to the customer.
- Enormity. As mentioned above, managing offshore sources often results in significantly higher inventory levels than do local sources. The size of such inventory across the supply chain can create difficulties in identifying the impact of the quality issue, as well as the ability to quickly repair or replace goods.
When you consider the size, complexity, and additional hidden costs associated with offshore sources, it is easy to understand why many organizations are reconsidering their position in China and other countries.
Shawn Casemore is president of Casemore & Co., a consulting firm specializing in supply-chain management.