Purchasing Preview: Hidden costs threaten the benefits of global sourcing
New research details the most overlooked costs that could derail global sourcing’s ROI
By Dave Hannon -- Purchasing, 2/13/2009 11:02:00 AM
A series of interviews with global sourcing experts confirms the findings of a recent Procurement Strategy Council report outlining the potential damage that hidden costs can do to the savings potential of a global sourcing program.
According to a recent report from the Procurement Strategy Council, the most overlooked cost issues in typical global sourcing cost models that could erode savings fall into two broad buckets: The hidden cost of internal obstacles and the increased sourcing process costs that often occur with global sourcing.
For example, non-participation by internal organizations to a global sourcing contract (defined as an internal business unit opting out of a given contract or supplier before it is in place) reduces savings potential on average by 8% while non-compliance (where buyers ignore an existing contract and buy through another source) could shave an additional 6% from the global sourcing savings. In both these scenarios, the volume of spend covered by the agreement is diminished, which in turn reduces the overall level of savings achieved.
As the two costs models show, lack of attention to such issues can cut global sourcing savings from 25% down dramatically to as low as 4%.
A further investigation of the hidden costs of global sourcing by Purchasing outlines nine hidden costs that could derail the ROI on a global sourcing program. Those hidden costs range from logistics-related issues to hidden costs of managing duties and tariffs to unexpected costs created by supplier finance and quality problems. That report will appear in Purchasing’s March issue.
The breakdown of global savings costs
Traditional Model (based on industrial products example)
Labor savings |
20-25% |
Depreciation |
5-10% |
Materials and components |
10-15% |
Economic development incentives |
0-5% |
Total savings on manufacturing cost |
50% |
Logistics, inventory costs |
-10-15% |
Ongoing management costs |
-5-10% |
Taxes and duties |
-0-5% |
|
Net cost savings |
25% |
Procurement Strategy Council Model
(factoring in the impact of hidden costs not considered in the traditional model)
Cost savings in traditional model |
25% |
Business partner nonparticipation (buyers opting out before contract is set) |
-8% |
Business partner noncompliance (buyers not using contracts in place) |
-6% |
|
Savings (subtotal) |
11% |
Resource-intensive sourcing activities |
-4-5% |
Reputation risk exposure and mitigation |
-1-2% |
|
Actual savings realized |
4-6% |
As this model from the Procurement Strategy Council shows, hidden costs such as non-compliance, internal resource costs and costs of mitigating reputation risk—including working conditions, foreign corrupt practices, and data security issues—can shave off significant savings on a global sourcing contract.
Now Playing: 