A recent article in World Trade Magazine, an Executive Overview on Near-Sourcing, has the doctor wondering if this is finally the year where people realize that going crazy on low-cost country sourcing is not always the smart way to go.
If the low-cost country is half-way around the world, as opposed to just a country or two away, then you’re going to greatly increase lead time and if we’re talking a rapidly developing economy, you’re going to greatly increase risk as well. That’s why the doctor has been preaching home-cost country sourcing, where you find a way to source in the local region in a globally competitive way. In other words, the doctor believes that near-sourcing, if you can achieve it, is the way to go.
The article, which defines near-sourcing as any kind of sourcing strategy that shrinks distance a measurable degree, notes that low-cost country sourcing with an extended overseas supply chain introduced a lot of risk factors into sourcing. It also noted that a recent AMR report that found that although 90% of companies surveyed confirmed they were outsourcing aspects of production, 56% admitted that the total landed cost relative to prior sourcing efforts had actually increased.
Let’s repeat that: 56% of companies that jumped on the low-cost country sourcing bandwagon found that their total-landed costs actually increased! That’s why the doctor continually promotes total cost of ownership modeling and value-based strategic sourcing enabled by true decision optimization. Otherwise, you might find that what you thought sounded like a good decision was actually a very, very bad one. As the article notes, without proper modeling, you might get hit by one or more of the following hidden costs:
- unplanned air / expedited freight
- the ‘fatal cost’ of poor quality
just ask Aris Isotoner (oh wait, you can’t!) or Mattel
- the ‘third shift’ effect
(lost revenue due to counterfeiting from the vendor that works two shifts for its customers and one for itself)
- the cost of distance
(outsourcing to ‘under-performers’ typically doubles inventory holding costs)
- rising fuel costs
And, when all is said and done, if you didn’t thoroughly investigate the new “low-cost” country sourcing opportunity, and do proper modeling, you too might find that your costs actually increased.