companies might choose to facilitate communication
and oversight by employing liaison/auditors who are
located close to the offshore source, and that cost also
should be taken into account.
3Potential risk-related costs: The cost impact of high-frequency risks, such as emergency air-
freight, scrap, and rework, to name a few, can be cal-
culated based on past experience with an existing sup-
plier. New products or potential new suppliers will
require estimates. Other risks tend to have a low prob-
ability but could still be devastating, so they should
also be considered.
a. Rework. If an individual item or an entire lot is
bad, then it must be scrapped. Does the supplier send
a replacement without charge, or do you incur some
cost whenever rework is required? The answer may
depend on how much leverage you have with the sup-
plier. These costs can be especially high for custom
products, such as molds or dies.
b. Quality. Who pays for scrap? In addition to the
cost of lost production and warranty-related payouts
when the product fails, quality problems are costly in
other, less tangible ways. Think of the cost impact of
lost market share, permanent loss of customers, or the
negative impact on brand image.
c. Product liability. How do the supplier candidates
compare in terms of accessibility, willingness, and abil-
ity to pay any product-liability claims? It can be diffi-
cult to sue a foreign company for damages, and even
harder to collect. A local supplier, by contrast, could
have been audited to verify that it had sufficient prod-
uct liability insurance.
d. Intellectual property risk. Approximately 5 percent
to 7 percent of world trade consists of counterfeit or
pirated goods, according to the International Anti-
Counterfeiting Coalition. 6 Some products, such as
software, movies, and fashion accessories, are more at
risk than others, a factor that should be considered in
cost calculations.
e. Opportunity cost. What would be the cost of lost
orders and customers when a supplier cannot respond
quickly enough to changes in quantity or product
specifications demanded by the market?
f. Brand image. What is the impact on brand image
of the product’s “country of origin” label? At a time
when developed nations are continuing to experience
economic instability and people are concerned about
their jobs, consumers may consider buying locally
made goods as a way to help the economy and their
neighbors. Recent product-adulteration scandals
(such as those involving pet food, medicine, milk, and
drywall) have also favorably influenced consumers’
attitudes toward locally made goods.
g. Economic stability of the supplier. It is much easier
to investigate and find accurate information about the
stability of a supplier located in the home market than
it is for a supplier overseas.
h. Political stability of the source country. It’s not dif-
ficult to rate the stability of countries that are already
in chaos. It’s much harder to correctly assess those that
are making good economic progress but whose popu-
lations may be destabilizing because of changing con-
sumer expectations and demands.
i. Exposure to another recession. The larger inventory
and on-order quantities associated with offshoring
represent an exposure risk if there should be another
severe business downturn. Four months of inventory
on hand, en route, and on order could easily turn into
much more in a recession.
ABOUT THE RESHORING INITIATIVE
The nonprofit Reshoring Initiative helps companies
understand their true cost of offshoring by applying the
total cost of ownership (TCO) method of cost calculation to objectively quantify the advantages of producing close to the customer. Although the primary users
of the organization’s services are U.S. companies, the
cost-calculation tools are applicable to any market.
To help companies make more informed sourcing
decisions, the Reshoring Initiative provides:
• Free Total Cost of Ownership Estimator software
(trademarked by the Reshoring Initiative) that helps
them calculate the real cost impact of offshoring
