OEMs seeking lower part costs may no longer consider overseas suppliers their first choice.
U.S. manufacturers struggle to keep costs down. They explore lean manufacturing, better technology and other cost reduction tools and strategies. Suppliers aren’t just trying to improve their profits, they are taking more steps to stop purchases from overseas suppliers.
Some job shops and contract manufacturers are adding more manufacturing processes to their shop in order to be more of a one-stop supplier. This approach can reduce or eliminate unnecessary shipping costs and speed up part and product deliveries – a goal favored by OEMs (original equipment manufacturers) as they seek new suppliers who can do it all.
How do hidden costs add up — when purchasing from overseas suppliers?
Let’s “spill some milk.” Just because, big box stores offer “Milk” at say, 35-50% less than any other store within a 30 mile radius, logic fails to prove that driving 30 miles to get the discount is actually worth it. Other costs include fuel (gas), opportunity loss (time), repairs and maintenance (car usage) — to name a few. On another note, does it make ‘cents’ to drive from the country to the city trying to save ten cents on each gallon of gas when the savings will be spent driving to the refueling source?
Offshore manufacturing supporters may claim these milk or gas examples are missing information. They are right! When considering total cost, there are far more expenses than just the manufacturing time and cost when using suppliers overseas, as well as incentives that reduce the cost when a U.S. supplier is selected. While it’s not good to “cry over spilled milk,” those examples simply demonstrate the similarity when anticipated savings from overseas sourcing may not be what they appear. They may be slim to negative.
So what’s the total cost comparison between overseas and U.S. based suppliers?
Total cost of ownership (TCO), summarized from Wikipedia - “is a financial estimate whose purpose is to help consumers and enterprise managers determine direct and indirect costs of a product or system and provides a cost basis for determining the total economic value of an investment”
President Obama recently signed the U.S. Senate and House approved “minibus spending” bill involving the 2012 budgets. In particular, this bill requires the Commerce Department to develop an online total cost of ownership calculator to help manufacturers determine all offshore manufacturing costs.
Working with U.S. manufacturers, Harry C. Moser, a 40-year manufacturing industry veteran and retired President of GF AgieCharmilles, recently founded the Reshoring Initiative. Offering support and training the Reshoring Initiative, supported by 23 companies and numerous trade associations, helps OEMs and other manufacturers recognize their profit potential by utilizing local sourcing and production. Mr. Moser also developed a TCO estimator (calculator) to help businesses identify and compare TCO. This complimentary tool combines cost and risk factors into a total cost offering objective decision making.
The U.S. Commerce Department is now developing a site to promote TCO and link to the Reshoring Initiative’s software.
“When I met with President Obama at the Jan 11, 2012 Insourcing Forum, my strongest point was the importance of using total cost of ownership (TCO), instead of just part price or labor rates, when making sourcing decisions. Our initial analysis of user data suggests that about 25% of what has been offshored to China might come back now if companies used TCO. Other executives at the Forum also support the importance of TCO.”
– Harry C. Moser, Founder and President
Cost estimating software and the TCO estimator can play a significant role in helping OEMs make the right decision. Supplier selection, when considering an overseas or offshore supplier verses a supplier from within the United States, should not just be based on part cost.
More about Harry C. Moser
Harry Moser founder of the Reshoring Initiative was recently added to Industry Week magazines Manufacturing Hall of Fame in 2010. 21110 Buffalo Run, Kildeer, IL 60047, USA Office +01 847 726 2975.
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