When one of our clients was experiencing too many warranty claims and product returns, we helped it to analyze and isolate actionable root causes of returns and allowances. It turned out that those problems were caused by a variety of factors, including inadequacies in training, technical ease of use, customer policies, and installation practices. The company then implemented policy changes, and its customer service organization implemented improvements in the areas of direct support, Web-based training, and field engineering, and instituted design changes, product literature DVDs, user groups, and other measures. As a result, the company was able to reduce its planned reserves (the cash allocated to cover costs associated with warranty replacements, returns, and allowances) by

20 percent, which instantly improved profitability.

8 Cost of supplier management. There are numerous costs associated with selecting, developing, and maintaining a supplier and ensuring that it meets expected performance levels in areas such as process capability, quality and reliability, capacity, flexibility in regard to changes, turnover and retraining, and so forth. As mentioned earlier, there are management coordination and travel costs.

Another common source of supplier manage-ment-related costs is a design engineering function operating under a lowest-unit-cost design metric. This focus on meeting low-cost targets frequently leads to the selection of cheap, substandard suppliers. I have witnessed so many products released to the market even though the selected contractor was not even close to capable of meeting quality and demand requirements. Although the price was right, product availability was not there. Beyond lost customer credibility, these failures have a huge impact on lifecycle margins. In addition, buyers that choose substandard suppliers may end up having to find new, reliable suppliers on very short notice, often at a higher price.

How can companies avoid or reduce costs related to managing substandard suppliers? This is a topic worthy of a lengthy paper on its own. But in very simple terms, the key lies in sourcing and selecting the right suppliers from the start. What you want is not necessarily suppliers that offer the cheapest price, but rather those that can reliably provide the overall capability and capacity to deliver consistent value in an uninterrupted supply chain environment. In addition to price, competence of leadership, cost-reduction and continuous-improvement plans and commitment, demonstrated quality, process capability, and production capacity are all important considerations that tend to get glossed over too often.

9Cost of cash flow. Because outsourcing lengthens and adds complexity and risk to the supply chain, in many cases it also lengthens the cash-to-cash cycles, which are proportional to the number of trading partners in the supply chain. The need to pay outside contractors can also make revenues and cash flow disappear. You could say that outsourcing can result in both slow and no cash flow!

Currency manipulations are the culprit behind these hidden cash-related costs. Very briefly, it is a fact that the Chinese currency is grossly undervalued. In effect, that means that for every US $1 of product that China sells to the U.S. market, Chinese exporters only have to charge the equivalent of 60 cents—a huge subsidy. For every dollar of U.S. product sold to China, meanwhile, there is the equivalent of a 30-cent tariff. Do the math: a 70-cent-per-$1 spend advantage. This is not free trade.

Shifting production closer to the end market instead of offshoring to a contract manufacturer often can speed up cash flow. One organization I know of was on a 90–120-day cycle and had profit-and-loss, inventory, quality, and cash-flow issues. An analysis revealed that over 90 percent of a high-margin product line manufactured in China was being sold in the U.S. market, specifi-