Purchasing recently ran a good article on the nine hidden costs of global sourcing that should not be overlooked if you think global sourcing is your way out of the downturn. It might be, but if you don’t consider all the costs, you could easily make a wrong decision.
As per the article, the following 18 costs (which includes 9 bonus costs found only in the web version) can add up and turn that 20% labor-based savings you expected to see into a 10% loss over your current solution when compared to your current arrangement.
- Internal Expenses
The resource intensity of sourcing in unfamiliar markets with unsophisticated suppliers can easily erode forecasted savings by 5%.
- Supplier Health
If a supplier goes bankrupt, there go your savings, and then some, when you have to quickly switch to a (much) higher cost of supply.
- Post-Contract Lull
In order to insure that savings materialize, you need to monitor the contract in the weeks and months after it is signed. There is a resource cost associated with the monitoring.
- Duty and Tariff Changes
A change in the duty or tariff rate could dramatically affect the cost of a product being sourced and the savings that materialize.
- Contract Non-Compliance
If your buyers go maverick, so do you savings.
- True Inventory Costs
Sourcing from an overseas supplier lengthens lead times, which increases safety stock, and increase time in transit and this significantly increases your average inventory cost.
- Logistics Volatility
Not only does increased distance increase your freight costs, but so do rapid increases in freight demand which could cause freight costs to spike.
Tracking product flow from global suppliers could require new technology, which will increase costs as well.
- Quality Breakdowns
If a contract manufacturer’s quality affects delivery of the part or increases the number of failures, it could wind up costing more than originally forecasted and wipe out the global sourcing ROI. And if it forces a costly recall, it could wipe out your business — period.
- Transition Costs
There’s nothing “soft” about this cost which will affect initial ROI.
- Margin/Burden Stacking
If supplier sites compete against each other, that can cost you.
- Lost Tariffs/Taxes
Improper classifications and missed recoveries on VAT add up quickly.
If you’re not careful, your supplier might try to profit off the packaging, taking another chunk out of your ROI.
- Logistics Costs
It’s not just freight — it’s handling, intermediate storage, and the costs of inevitable delays.
- Hardware Costs
Some overseas suppliers have difficulty obtaining standard parts at your cost. Failure to recognize this, and help them obtain parts cost effectively, also costs you money.
- Labor Costs
Failure to understand the labor cost breakdown can cost you.
- Markup vs. Margin
Know the difference — it can be very substantial.
- Burden on High Dollar Parts
Some suppliers may try to burden a $6 part the same as a $6,000! Be careful!