Global Logistics and Supply Chain Strategies - June 2008 - (Page 30) Hidden Costs Can Sabotage Gains of Outsourcing for Manufacturers BY JEAN V. MURPHY So-called ‘soft costs’ are embedded in operations, but invisibility doesn’t mean there any less real or detrimental to the bottom line. T he search for lower operating costs caused a stampede of companies to rush to outsource manufacturing beginning in the mid-1990s. Those same cost pressures continue to drive the outsourcing trend today among both true believers and those who feel forced to the decision by competitors. The outsourcing model basically is one in which companies focus on the “core competencies” of product design and marketing, while sending manufacturing to countries with low-cost labor. It clearly has worked well in a number of industries, but outsourcing veterans have learned that success involves a lot more than merely having someone do over there what used to be done here at home. Moreover, anticipated savings easily can fail to materialize due to unmanaged risk and unanticipated or overlooked costs in the supply chain. “In a lengthy supply chain, complexities can produce costs that are implicit and not taken into consideration during the initial outsourcing analysis,” says Richard Ligus, president of Rockford Consulting Group, Rockford, Ill., which specializes in helping companies develop and implement manufacturing and supply chain strategies. Most outsourcing analyses look at total landed costs, “but leave out the implicit costs such as exchange rate variances, cash tied up in floating inventory on the high seas, expediting efforts, engineering changes, travel, and loss of a customer order because of late deliveries or deliveries of wrong or defective products.” Ligus estimates these hidden costs can add as much as 40 percent to a product’s total cost. “Hidden costs are deceptive but need to be included in the total cost analysis of offshoring,” he says. Some costs may be recognized up front, but companies fail to account for the inevitable creep upward of these costs over time. Beth Enslow, senior vice president of the supply chain risk management practice at Marsh, New York, notes that food prices in China have risen 23 percent since February, while studies show wages going up between 5 percent to 10 percent a year and raw material costs rising 7 percent a year. Fuel costs also are a huge issue and as China becomes more concerned about the environment, costs there will rise, she says. “Companies are fooling themselves if they think their China-based costs will remain the same.” Companies also fall short when it comes to estimating costs of maintaining solutions, says Gary Lynch, global leader of the Marsh supply risk management practice. “Most companies are not aware or have not taken the time to understand the maintenance of particular solutions, whether it’s a security solution, complying with a regulation or 30 JUNE 2008
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