Outsourcing to the geographical location where cost of delivering services is the lowest has always been the outsourcing strategy for the companies worldwide. When it comes to choosing the location to outsource, most of the companies compare the wage difference between different offshore locations and decide to outsource to low wage rate countries. According to industry experts, even though labor cost is an important factor, other quantifiable cost should also be considered while selecting the location to outsource. But there are many companies who fail to do so.
In case of OEM’s also, the things are not different. Most of the OEMs also consider only the wage rates as a factor to evaluate their outsourcing location decision. They neglect other quantifiable costs which results in a higher cost and diminished service level. The challenge for these companies is to identify these costs, evaluate them and incorporate in their outsourcing decision making. Consultancy firms like Riverwood Solutions which is based in US help these companies to evaluate these costs and find out the best offshore location to outsource their process that will result in real cost reduction.
Below discussed is a case study as how Riverwood solutions helped a US based OEM to select the right location to outsource production.
The client was an OEM based in US which serves the North American market.
They approached Riverwood Solutions to provide them a marketing strategy to select the right location to outsource their production. As like many other OEM’s, the client was also outsourcing their production to China with the assumption that the move will reduce their direct product cost. However they found that the decision did not provide them any benefit when considering the overall cost.
Riverwood Solutions with their past experience applied a broader analysis of all the quantifiable costs. These costs include inventory related cost, manufacturing support cost, transportation and logistics cost other than direct cost. They also considered macroeconomic factors like inflation, currency fluctuations, cost variability and customer requirements for analysis. These costs were used as a base to evaluate the manufacturing suppliers of China, Asia, US and Mexico.
- Inventory related cost (IVC) is a way to measure the total cost of procuring and owning the inventory. A high value of inventory cost can result in high cost of financing inventories. When measured, the IRC for the particular project, it was found that sourcing from the shorter transit location can produce significant cost savings.
- Manufacturing support cost refers to the costs incurred by the companies to manage supply chain and their outsourcing partner.
- Transportation and logistics cost include the changes in fuel cost, shipping rates and the cost to land the products to end market.
- Macroeconomic factors include the labor cost inflation, currency fluctuations, changes in the government policies of the offshore location etc.
Findings and Benefits
After subjecting all the quantifiable costs to a broader analysis, it was found that Thailand could provide them the lowest possible cost solution, followed by Mexico, then China and Philippines. The OEM outsourced their production to the supplier in Thailand and the end result was surprising for them as it resulted in real cost saving when compared to the cost saving offered by their Chinese supplier.
The case study clearly depicts the necessity to analyze all the fixed, variable, direct and indirect cost before selecting the location to outsource a business process.