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Offshore Sourcing: Balancing Cost Savings & Risk

Many purchasing professionals I meet are wary of exposing their company to a supply line risk by buying offshore. It's not an unfounded concern, since there are many examples of things going wrong. It's really important to balance the potential cost savings against this risk of failure. 

An article authored by Thomas A. Foster, titled Global Logistics & Supply Chain Strategies, highlighted the issues:   

Sourcing from offshore suppliers in China, India, Eastern Europe, Latin America and other low-cost regions is so widespread that few manufacturers and retailers can be competitive unless they join in this trend. In fact, the U.S. Federal Reserve Board attributes much of the recent economic growth and low inflation to this offshore outsourcing 'best practice.' However, the downside of offshore sourcing receives far less attention at the Fed or in any boardroom-at least until something goes wrong. 

He goes on to point out that companies that source more often from off-shore sources, hoping to capture cost savings, run the risk of losing financial transparency, operating visibility and reliable logistics. In these scenarios, the risk of serious supply chain disruptions increases geometrically, he added. He points to a supply chain risk assessment study from Boston-based Aberdeen Group where four out of five supply management executives worked in organizations that had experienced disruptions in the previous two years that had been “serious enough to negatively impact their companies' customer relations, earnings, time-to-market cycles, sales, and overall brand perceptions. “

Let's put some real numbers to this. Establishing a single offshore source, including time and out of pocket expense, can cost more than $50,000. If there's an issue, revisiting a supplier when there is an issue can cost that again—when you consider that hotel and airfare can easily reach $10,000 per person. Even then, there's no guarantee that the problem will be resolved by that visit. 

Not a huge number to you? Now, add the cost of disappointing customers. That's a huge cost. Then, add the cost to  write off of bad product, again big figure….and to pour salt in the wound, think about how much it would cost to make several trips before you realize there will be no resolution. 

Let me share one real life example: One customer of ours had the unfortunate experience of finding 20% of the goods they received from their Asia based supplier failed in system in the field. The supplier insisted they did not nothing wrong and would not support any reimbursement.  This was after scrambling to replace units in the field for customers, and two engineers flying to China for a week.  The customer finally turned to us for the re-work at a cost essentially equal to the original purchase price.  Ouch.

So, what does the OEM, with limited resources do to compete on the same level as the big guys, who have deep pockets, and feet on the ground in Asia? 

The answer is to shift the accountability from the offshore supplier to an experienced provider of managed PCB manufacturing services in the United States. A good CM can eliminate the risk of poor quality, and greatly mitigate the risk of supply line disruption. 

Good CMs pay rigorous attention to technical details on the front end, using only developed, strong, factory relationships. They ensure quality with incoming inspections, and by holding the factories accountable for any errors.

Basically, the recipe for success is knowledgeable feet on the ground here, with the skills and experience to manage complex Asia based electronic projects, as well as, and perhaps most importantly, the ability to take financial accountability for the results.

Eliminating risk and capturing the savings from offshore is possible, but it takes a balanced approach. 

1 comment on “Offshore Sourcing: Balancing Cost Savings & Risk

  1. michaelmaloney
    October 3, 2018

    It is not uncommon for businesses to want to cut costs in every aspect that they could find. However, in the midst of trying to implement cost-saving measures, certain processes could be overlooked and this could increase potential risks. They need to weigh the savings against the risks involved so as to derive with a decision whether or not they should carry on with the initial savings plan.

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