DC Velocity - IdeaBook 2014

x Oil prices have tripled since 2000, making car-go-ship fuel much more expensive.

x Wages in China are now five times what they were in 2000 and are rising at an annualized rate of about 20 percent.

x Some American labor unions have learned a painful lesson about today’s economic reality, and they know they must become globally competitive.

x The natural-gas boom in the United States has dramatically lowered operating and facility costs. In Asia, meanwhile, natural gas rates are four times those in the United States.

x Higher material-value content in products, combined with impressive productivity gains through continuous-improvement initiatives, has made chasing labor savings the wrong game.

x Much of the illusive labor savings in low-cost countries is trumped by the hidden waste and overhead costs required to make the overall supply chain function well.

Organizations that are willing to re-evaluate their present outsourcing processes and practices, factoring in the above points and other considerations, will see a different picture of success emerge. By analyzing and eliminating the hidden waste and associated costs in their outsourcing processes, they could potentially discover millions of dollars in savings, depending on the size, scope, characteristics, and geographical logistics of their outsourcing activities. These analyses may point to the strategic option of modifying their offshoring decisions, which might include “reshoring”— bringing production back to the United States or other end market.

The rest of this article will introduce 10 “hid-
den” outsourcing costs that usually generate sig-
nificant savings when they are reduced or elim-
inated. These savings fall into the general areas
of velocity improvement, quality improvement,
cost reduction,
resource opti-
mization, waste
elimination, and
improving the overall
customer experience.
Here are what I con-
sider to be the top 10
outsourcing cost areas
offering opportunities for
improvement:

1 Cost of an outdated out- sourcing strategy. This cost-reduction opportunity involves a rationalization and reassessment of the current outsourcing portfolio in terms of revenue topology (where and how sold) versus the sourcing decisions (where made) that drive costs. Markets shift over time, which may drive up logistics, transportation, in-tran-sit handling damage, and other hidden management costs. An effective tactic in this regard is to review the outsourcing content and commitment levels for individual country sites, and plan how to relocate parts of those operations (for example, a segment of the final assembly) to respond to emerging market opportunities in other countries. For example, if 100 percent of the design and manufacturing for a product is located in China, it would be difficult to serve an emerging or fast-growing market in Brazil or Los Angeles.