Check the hidden costs
Paul Teague, Editor-in-Chief -- Purchasing, 9/15/2005 2:00:00 AM
Few things are ever as simple as they seem. Take low-cost country sourcing, for example. On the surface there can be great savings. But before you decide it's for you, check under the hood. There may be hidden costs you haven't accounted for.
You'll find some of them in our cover story in this issue, "India takes first steps in electronics." As our Executive Editor for Electronics Jim Carbone reports, there are several factors driving India's growth as a magnet for electronics manufacturing services companies—and a few obstacles to that growth, ranging from power-generation capacity to highway conditions.
There are several studies on the trend of sourcing off shore. The Aberdeen Group (www.aberdeen.com) has published a study on "Low-Cost Country Sourcing Success Strategies," complete with case studies. Another study comes at the subject from the perspective of engineering. Nick Dewhurst, executive vice president of Boothroyd Dewhurst, and David Meeker, a consultant with Neoteric Product Development, have written a report that says manufacturing companies can often cut more cost by paying attention to design in the concept stages of a product's development than they can by doing the manufacturing in, say, China. Why? The answer is hidden costs in areas like shipping and logistics, finding a vendor, quality issues, and travel and communications.
Those and other factors—legal, theft and piracy, management costs—can add 24% to the total cost of the product, the authors say.
One interesting statistic cited in the study is the losses from shipping. Every year, the authors say, 10,000 containers fall overboard. Examples: 80,000 Nike tennis shoes, 500,000 cans of beer, and 5 million Lego plastic pieces. Try estimating the added cost from those mishaps. For the full study, see www.dfma.com.
For your calendar
You can learn more about low-cost-country sourcing and other vital procurement issues at a special CPO's Summit, jointly sponsored by PURCHASING magazine and the Aberdeen Group. Scheduled for November 16 and 17 in Boston, the Summit will cover the outlook for commodity prices, directions for supply-management technology, spend compliance, supply risk management, category management, aligning with corporate business plans, and procurement outsourcing. Click here for details.
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