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  • Paul Eriksen

Overseas Sourcing and Business Case Considerations

Corporate decisions are (hopefully!) made based on business case deliberations. It is critical that the metrics and considerations applied are indicators of significantly increased competitiveness.

The above being said, a business case for both domestic sourcing and overseas sourcing can be made. As per everything in business, the primary factor in both cases is related to the customer. In other words, can a product be provided to a customer when they want to buy it, and if not, can it be provided within the time frame that the customer is willing to wait before purchasing an available competitive product?

An underlying factor that drives cost in the sourcing decision is waste. In other words, how much does it cost an Original Equipment Manufacturer (OEM) to ensure a sale is consummated?

Essentially, the tie to the customer is best understood by a thorough understanding of the dynamics of the market and the end-use of the product. This drives the manufacturing flexibility and agility needed to support acceptable customer fill rates. Since most OEMs have high inventory turns - which are in effect “true” critical-path lead-times - the essential factor in assuring this flexibility is the response agility of suppliers to changes in market demand from what was forecast.

Thus, a significant factor in selecting a source should be whether or not they are capable of supporting the market dynamics as described above. Over the years in my interactions with OEMs a capability for agile response is not considered during the supplier selection process. Instead, the primary selection criteria is piece-price. As a consequence, at least in my mind, piece-price becomes the dominant but inadequate driver in building the business case for sourcing.

I recognize that piece-price will always be a factor in source selection, but it should also be recognized there are other important factors that should be part of the decision, and these are not just associated with getting a purchased part to a customer’s receiving dock.

All the above leads us back to the premise that both domestic and overseas sourcing decisions can be justified through business case analysis.

For instance, when market dynamics are very predictable - enabling forecasts to be generally more accurate - sourcing overseas may be the best overall financial decision. Along the same lines, when market dynamics are highly variable, forecasterror will invariably increase, sometimes significantly. Supplier agility and lead times become more important, and domestic sourcing may be a valuable competitive advantage.

Supply management’s sourcing decisions affect not only a product’s cost-of-goods sold but can also impact profits resulting from product availability and incremental sales. The supply management team are hailed as heroes when supply availability enables incremental sales, and they are generally blamed when supply constraints lead to lost sales, but I have yet to see an OEM take this into consideration when selecting a source.

It is also important to note that consumer expectations are becoming increasingly variable and increasingly urgent as cultural trends of instant gratification become the expected norm. Tracing this backward through the supply chain suggests a greater need for supplier agility and responsive lead times.

About the Author: Paul Eriksen

Paul D. Ericksen is a founding member of The Onshoring Project. He retired from John Deere in 2006 after holding several managerial-level positions in the supply chain area over his 30 years of service. His last assignment at Deere was as process-owner of the company’s supplier development function. He later went on to serve a stint as Chief Procurement Officer at a Fortune 300 company. Ericksen has written widely on supply chain issues. Paul advises companies and organizations on supply management strategy and practice, as well as promoting progressive changes in supply management strategy.

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