This technical information has been contributed by
The Rodon Group
Beware: The Hidden Risks of Offshoring
Cargo from China goes unloaded during a recent port shut down due to a labor-management dispute that affected all 29 West Coast ports. Those ports handle about one-quarter of U.S. international trade, worth about $1 trillion annually. Companies that reshore to the U.S. have said shipping delays are one of the reasons they turn to American-based suppliers.
Photo courtesy of ThinkStock.
HATFIELD, Pa.—When determining the best place to source parts and services, companies should consider not just the “lowest price,” but the “best price,” which takes into consideration all of the total costs and risks that go into offshoring. This can include shipping delays, lead time delays, and loss of intellectual property (IP).
The Rodon Group, a high-volume plastic injection molder based in Hatfield, Pa., has worked with many companies, including Walmart, to reshore work. Rodon is an avid proponent of the “Made In America” philosophy, having participated in the 2014 Manufacturing Summit in Denver and the White House “Select USA” roundtable discussion last May. The company is also an active member of American Made Matters.
The Rodon Group has published “Hidden Risks in Your Offshore Supply Chain,” which gives an overview of the hidden risks associated with offshoring and suggests that OEMs conduct a total cost analysis—such as the Reshoring Initiative’s free online Total Cost of Ownership (TCO) Estimator—before deciding where to source. More information on the TCO Estimator is available at www.reshorenow.org.
Following are excerpts from “Hidden Risks in Your Offshore Supply Chain,” by The Rodon Group.
Costs: Factors that contribute to the complete cost associated with a product
Labor. For years, China and other countries have been able to capture manufacturing contracts based on hourly rates alone. At first, these costs may appear to be cheaper. However, many companies also invest time and money to make sure these low cost suppliers meet their quality requirements and specifications. Today, the increase in foreign wages has changed the equation. When you factor in all other costs, China is no longer the low cost provider it once was.
Intellectual Property Loss. Companies large and small have found it very difficult to protect their proprietary design in some foreign countries. Chinese OEMs have become notorious for these infractions. If your product has unique advantages over the competition you may want to consider keeping your OEM close to home or even manufacturing in-house. Unless you are a large corporation that can afford to take the risk, there is little recourse in many countries to stop IP fraud from occurring.
Shipping. Many companies fail to understand the full cost of shipping from China and other low-wage countries. Many foreign manufacturers will include FOB (free on board) shipping. FOB is the price paid by the manufacturer to get the goods to port. Once on the carrier, the purchasing company pays for the remainder of the shipping costs to the final destination (s) as well as import duties and taxes. All of these charges need to be considered to assess total shipping costs. Time to market is also a cost if there are any delays that occur in receiving goods for sale. When commitments and timelines are not met, profit is lost, Once a delay occurs, to get merchandise to market in time, some manufacturers have used air freight to expedite the shipping. Air freight can be ten times more expensive than shipping by container which can erode margins quickly.
Determining True Costs. To determine if off-shoring your supply chain is really the right move, use the Total Cost of Ownership estimator created by the Reshoring Initiative. This calculator outlines 36 variables that will impact the final cost to the purchasing company.
Scheduling: Factors that impact the time needed to bring a product to market
Lead Time. Distance can make a real impact on the efficiencies and costs of your supply chain. Companies with off-shore suppliers must build in lead time delays into their inventory to insure they have enough product to meet the market demands. If they overestimate, they risk having surplus product they can’t sell. If they underestimate, they end up short on stock and with unhappy customers. These inventory costs can add between 20 to 30 percent to total product costs. Choosing suppliers closer to the consumer provides improved inventory planning and response to market conditions. A new tool created by the Op Lab at The University of Lausanne, Switzerland, called CDF (Cost Differential Frontier tool) can help companies determine how lead times impact the cost of off-shore sourcing.
Time in Transit. If working with offshore suppliers, transit time is a big consideration. Companies need to allow not only for the time to port, but from port to destination. Savvy buyers will also build an additional time for potential delays. Worst case, product shipments must be expedited using costlier shipping arrangements. Shipping from China to the East Coast, takes approximately 30 days, while the West coast takes less time (on average 20 days). If your factory is using an inland port initially, it could take several days before the shipment arrives at the ocean access port. Preparing documentation, getting through customs, and shipping from the port can add several weeks to the journey.
Factory Delays. Factory delays can lay any strategic plan to waste. Delays can be caused by problems in material sourcing and delivery, worker unrest, or the factory being at overcapacity thus straining resources to meet demand.
Delivery Delays. This might occur when customs has found an issue with the product or a product has been found to be inferior and is rejected. Parts that don’t meet the quality standards of the importing company or government agency can cause substantial delays in delivery.
Trans-shipment. Trans-shipment occurs when products begin their journey using one form of transportation and end it using another. This might occur when a shipment is not large enough to fill a container but must be consolidated with others to meet the carrier’s requirements. Unfortunately, this consolidation can add substantial amounts of time and these delays cannot easily be addressed. If a company chooses an offshore or Chinese supplier, they should include additional time as a buffer against any unforeseen transshipment delays.
Compliance: Requirements and government agencies that impact the importation of goods
Agencies. Products from other countries, particularly China, face additional scrutiny. The two key agencies in charge of protecting our product and drug safety are the FDA (Federal Drug Administration) and the CPSC (Consumer Products Safety Commission).
CPSC Compliance. To be sure that products comply with CPSC regulations; suppliers must verify that all parts and materials are also compliant. This can be complicated when multiple suppliers are involved. There have been reports of suppliers claiming compliance when the ned product did not meet the standard. If a product is in violation and it is seized by customs, the purchasing company may face penalties, may need to destroy the faulty products, or make revisions to meet safety standards.
Ethical Sourcing Audits. Tragedies in China, Bangladesh, and India, have underscored the need for purchasing companies to be aware of how their suppliers operate within their countries. Consumers are demanding that working conditions, hours, and wages improve in these impoverished areas. In response, many companies have established Ethical Sourcing Audits as a part of their overall corporate responsibility mandate. These audits may include verification of working conditions, documentation of employee policies, on-site inspections, and employee interviews.
Customs. This is the last stop on the product’s journey from an overseas supplier. Since the 9/11 tragedy, the role of the Customs agency has expanded to include border protection as well. Today the CBP (U.S. Customs and Border Protection) is concerned with insuring products coming into this country pose no threat to our national security. This includes inspecting containers and shipments to insure that no tampering has taken place. They are also responsible for insuring that all duties, taxes, fees, and tariffs are collected. The increased scrutiny of imported goods has placed some additional burden on importers. All shipments must be clearly marked with details regarding the contents including country of origin. Other information may be required based on the product.
Source: The Rodon Group. Reprinted with permission.
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