Global Sourcing

From WikiSCM

Uncovering the True Costs of Global Sourcing

Many companies have either made––or are in the process of making—the transition from a regional, build-and-sell business model to a sell-anywhere, build-anywhere and source-anywhere business model. This globalization has led to dramatically increased supply chain complexity. The transition includes both new global sources of supply and new global sources of demand. In many cases, these demand and supply location decisions are interlinked as companies invest and create sources of supply in countries that they also want to become markets for their products.

In fact, establishing sources of supply in low-cost countries has become a condition for survival in many industries. The piece price of many parts and components from low-cost countries such as China and India is 30–90 percent lower than from established countries such as the United States and Germany. Piece price is just one part of the overall cost that a company must pay, however. The metric that counts is total landed cost (TLC), which is the negotiated piece price plus all of the costs that are necessary for delivering that part on-time and ready for use within a manufacturing or assembly plant.

Increased costs of global sourcing

When moving from a local to a global source of supply, part price comes down substantially, but supply chain costs go up considerably. For example, it takes just 1–2 hours to get parts from a manufacturing facility in Dayton, Ohio to an assembly plant in Lansing, Michigan. But it takes more than 24 days to get those same parts to the same assembly plant when they’re coming from a manufacturing facility in China or Malaysia via a containerized ship through a U. S. West Coast port. In addition, despite having a low-cost country-based source for this part, the assembly plant will almost certainly have a just-in-time stocking center located within 30 minutes of the plant that will store 7–14 days of supply of the globally sourced part.

Te percentage of total landed cost that is attributable to supply chain can go from less than 3 – 5 percent in a local sourcing environment to as much as 35 percent in a global sourcing environment. This is due to the increased length and risk of the supply chain and all of the associated implications, including increased transportation costs, increased buffering for cycle stock, safety stock and other risk factors, as well as all the handling, insurance, customs, tax, interest and storage costs.

At the same time, an overarching concern is the increased supply chain risk that has to be considered and managed. In addition to “typical” risks, such as shipping or custom delays, logistics-interface misroutings or supplier scheduling shortfalls, there are potential threats from natural disasters, such as hurricanes and earthquakes, as well as from geopolitical events, terrorism, port strikes, exchange-rate fluctuations, fuel-price volatility and pandemics. The key point for companies to grasp is that while low-cost country sourcing is an excellent way of reducing costs, a whole new set of factors has to be considered with much more precision as part of the sourcing decision process. Furthermore, consideration of supply chain factors must occur frequently across the product engineering, procurement and supply-operations organizations within a company. In most cases, total cost still goes down substantially. However, it is important that sourcing decisions are based on a complete view of overall cost and risk. Balancing cross-functional costs and tradeoffs

This is where a new-generation solution can be applied to the traditional total-landed-cost sourcing equation and be of value. Total landed cost sourcing is the process of analyzing and determining sources of supply for parts, components and finished products based on all parameters that contribute to cost and risk. In the past, this has been computed largely based on piece-part price by the procurement organization. In today’s complex, global supply chains, it must be computed by using data from the relevant functions inside a company and from suppliers.

Companies typically do not have the business processes and technologies necessary to support these decisions in this more complex world. Many companies have taken steps forward by using manual data gathering and manipulation and spreadsheet-based tools. This is a labor-intensive effort that includes a lot of non-value-add data gathering, little real analysis and, ultimately, suboptimal decisions.

Best-practice organizations have created a supply chain engineering function that collapses the boundaries across the engineering, procurement and supply chain organizations and puts in place technologies that automate the silo-based data gathering and manipulation and provide decision support and scenario management to arrive at optimal answers to total-landed-cost sourcing equations. These answers are based on balancing a host of price, transportation, inventory and risk variables, as shown here.

The total-landed-cost sourcing analysis and decision loop starts from a definition of cost targets and sourcing constraints and automates data management and cleansing of the various cost, transportation, lead time, inventory, service level, variability and network data. Then network, inventory and transportation optimizers analyze the data to arrive at alternatives for decision making. Various scenarios may be composed and executed in an iterative fashion. Once the scenarios are analyzed along with part pricing, decisions can be made in alignment with company objectives. The decision loop is completed by feeding the data, scenarios and decisions to a performance-management function for additional reporting and analytics that can be used for continuous learning and ongoing compliance management. The total-landed-cost sourcing equation has evolved to be quite complex. Now, there are more advanced, new-generation systems that can deal with this complexity for optimal decision making.