Companies today move millions of dollars offshore to reduce their material spend. Many then further negotiate with new suppliers for weeks and months to squeeze another couple of percentage points off their price. They then unconsciously let 5 to10 percent of their materials spend slip away by not paying attention to their other cross-border supply chain costs. As companies expand their global sourcing efforts they tend to over-simplify the complexities of a dynamic global supply chain, attempting to fit everything into a spreadsheet. Too often a decision is made to use average cost factors based on an assumption that the cross-border aspects of global supply chains are too extensive to properly track.
Supply chain executives base this erroneous assumption on conflicting feedback regarding the impossible complexities inherent in accurately modeling global supply costs. Defaulting to a common practice, companies attempt to use in-house resources, such as logistics staff already cut to the bone and buried in fire-fighting exercises, or they rely on third-party logistics (3PL) resources, which have the primary objective of expediting shipment traffic, not minimizing import duty and tax exposure, to populate local spreadsheets. This default process only magnifies the inherent inadequacy of in-house tools to handle critical cost drivers of a global supply chain, which include: Rapid rate of change; extensive use of exceptions and situational rules; subjective interpretation of foreign import regulations; and the application of non-linear tariff formulas.
Unfortunately, firms often identify that the 10 to 30 percent projected savings anticipated from moving spend to a low-cost country (LCC) source is not showing up on the bottom line.
Usually in a company's next step, a project team forms to explore where the savings went. Starting with finance, but quickly expanding to include a supply chain and procurement specialist, the team's research focuses on the spreadsheets used by various groups attempting to model each person's specific areas of responsibility. The logistics representative works on the transportation rates, the procurement representative on the supplier invoices, and finance on payment records.
After surveying the available information, the domain specialists start to uncover the real factors that limit their ability to accurately model, or even understand, all the costs associated with moving goods from low-cost country suppliers to their plants.
For example, if logistics can get the correct transportation rates, and if the supply chain group can get the duty and import fees, and if procurement can get the Incoterm information, and if finance can supply the new supplier costs and if this data gets integrated correctly into a spreadsheet, then it is possible to make some initial calculations.
But what if an organization wants to enrich this process and run What if? scenarios to identify the best possible cost options based on current capacity and demand constraints. Even for a simple study involving two suppliers, four parts, one plant and two to three variables for transportation and other costs, requires over 50,000 calculations to reach an optimal cost estimate.
Today, as this problem grows too large to ignore, efforts to remain competitive force firms to optimize their global sourcing planning and execution. Companies understand that they cannot expand dependency on offshore suppliers without accurate assessment of total costs. They also recognize that to ignore global sourcing allows competitors a 5 to 10 percent cost advantage.
World merchandise trade ended 2003 4.5 percent above the 2002 mark, and global GDP rose by 2.5 percent. The WTO is predicting even faster growth in 2004, forecasting that world trade will shoot up by 7.5 percent and world GDP will rise 3.7 percent. (Source: World Trade Organization.)
Creating a global sourcing process with an emphasis on evaluating all costs (i.e. TCO) is a task that can be accomplished with relative ease and immediacy.
Ingersoll-Rand is one of many leading manufacturers that sought to cut costs by sourcing materials overseas. When the company began using a TCO methodology to look closely at its offshore sourcing patterns, the company discovered that making the shift to a low-cost country source wasn't as financially promising as first glance would suggest.
In some cases Ingersoll-Rand found that parts were actually more expensive to source overseas; one particular part actually increased costs 200 percent. Ingersoll Rand also learned that it was not uncommon for up to 25 percent of the total cost of a commodity purchased internationally to be duties, taxes, freight and other related fees.