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Outsourcing's Total Costs
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It's hard to think of a word more emotionally charged than outsourcing.

On the one hand, cutting costs has rarely been more urgent, and on the other, the plight of people losing jobs has rarely been more desperate.

The decision to outsource often revolves around the cost of labor. Many companies face the question, "If people in China are paid a fraction of what people in Detroit make, isn't it a good idea to have them do the work?"

What's missing from this chain of thought is the total cost of getting the product to the customers who want to buy it. That includes the cost of unsold inventory, lost sales if you don't have the right inventory, inventory tied up in weeks of transit, the potential for higher defect rates than promised, and the risk of compromising intellectual property (methods, as well as tool and product designs). There are times when those costs outweigh the immediate labor expense.

For example, Peerless Industries, a leading maker of audio and video display mounting systems, outsourced die-casting to China for 10 years. The goal was to make inventory available to meet the expectations of customers who wanted orders filled in a few days with a supply chain that took weeks. The company became concerned about inventory costs as well as control over products, designs and its own destiny, Peerless President and COO Michael Campagna explained in a recent PBS interview.

As a result, the company brought die-casting work back to the area around its Aurora, Ill., home base. The rough economy of the last two years eased the change. Skilled factory workers were available, and there were equipment bargains to be found. Peerless acquired a 175-ton press brake at auction for $70,000, about half of what it would have cost otherwise. In addition, real estate prices were favorable, with locations offering tax incentives, capital equipment financing help and assistance in training workers.

For ideas to help you analyze total supply chain costs, consider checking out Building a Lean Fulfillment Stream, a new book by Robert Martichenko and Kevin von Grabe.

 


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