ufacturing to the United States or other end
market.
2Cost of management and coordination of contractors. People often are shocked when they calculate the total annualized
cost of management and coordination of outsourced production. This includes the cost of
employees’ time and travel expenses incurred
when they visit suppliers, plus any other identifiable lost opportunities, such as lost sales, missed
market opportunities, warranty and returns, and
loss of customer confidence. The cost of these
activities can quickly add up to millions of dollars,
much of it symptomatic of deeper problems, such
as weak local leadership, poor direction of the
outsourcing supplier by the buyer, or bad supplier
selection.
To keep those costs under control, collect
and analyze the relevant data over time; play
the “ 5 Why” game developed under the Toyota
Production System (asking why something happened, and then questioning each subsequent
answer until you find the root cause of the problem); and segment the recurring root causes into
various priority and corrective-action buckets.
Then you will have an actionable basis for reducing management and coordination costs.
3Cost of subpar inventory performance. Outsourcing manufacturing reduces flex- ibility in design as well as the ability to
respond to schedule changes. This usually translates into more inventory in the global pipeline,
more mismatches between supply and demand,
more shrinkage from variances (count errors,
theft, weak disciplines, and so forth), and more
excess and obsolete inventory. Additionally, think
of what happens in many organizations at the
end of the month, when planned inventory is not
available for sale due to the reasons above. Rather
than selling the higher-margin items as planned,
they end up selling whatever they have on hand in
the warehouse to make sales quotas. Then there
is the “cost of lost sales” element. Depending on
the product, back orders can push customers that
really need the unavailable product to a competitor that can meet their requirements. These hidden, inventory-related costs alone could add up to
10 percent or more of total revenues.
With outsourcing, an “all things to all customers” strategy just doesn’t work. Product-line rationalization and pruning, and a more segmented
demand-chain strategy that recognizes the unique
requirements of different demand streams helps
this situation. However, these types of analyses are
not easy and require constant attention to changing markets. One needs to evaluate various fulfillment options in light of different demand stream
characteristics, but using real data and facts (
rather than reactionary perceptions and opinions)
greatly helps the process. For example, if you are
a large retailer, the fulfillment strategy for large,
high-volume furniture items in the suburbs of a
large city should be different than the fulfillment
strategy for small, low-volume items like vases
in a rural area. Demand chain management is a
critical enabler of profitable cash-to-cash cycles.
4 Cost of unplanned logistics activities and premium freight. Outsourcing reduces flexibility and therefore makes it difficult
to be responsive to changing customer requirements. Furthermore, outsourcing increases the
distance and the number of touch points between
order entry and order fulfillment. Poor planning
and oversight in such a highly complex demand
and supply chain leads to unnecessary expenses.
For example, when many “hands” are involved,
the right products in the right mix and volumes
may not be in the right places at the right time. A
product needed for a U.S. customer may sit in a
European distribution center, or product needed
by a distributor in one city may be delivered to
another distributor that does not need it. When
those types of mistakes happen, companies end
up spending a lot of money to move product at
the last minute by air.
Companies can prevent such mistakes and
the resulting “emergencies” through better planning and control over deliveries of outsourced
products. In one organization, for example, the
chief executive officer (CEO) walked through
the purchasing department and said, “Whatever
you do, don’t run out of material. Use premium
freight if you need to.” You can guess the rest of
the story: More than half of the items delivered at
the receiving dock arrived via premium freight,
