Total Cost Modelling for Overseas Sourcing/Outsourcing
Overseas outsourcing/sourcing in manufacturing industry can be costly. The cost savings may not be as great as they seem. Recently, many UK manufacturers have transferred their production to low cost regions all over the world including Mexico, India, and China. Among the various motives for these international outsourcing/sourcing projects, seeking cost effectiveness is most frequently mentioned.
However, the cost savings may not be as great as they seem. Although cheaper labour can be obtained, other extra expenses will also occur. These include:
- Transportation, duty, insurance;
- Cost entailed by inferior quality, such as additional quality inspection, rejection, rework, downtime, scrap, warranties, brand reputation degrading and loss of market share;
- Cost resulting from longer lead time and poor delivery, such as increased inventory, obsolescence, expediting, premium transportation, downtime, loss of sales;
- Overseas supplier training and engineering support expenditure;
- Administrative cost of maintaining relationships with new suppliers;
- Dealing with local government for special policies, constraints or even
- Cost related with currency fluctuation risk;
Cost related with Intellectual Property (IP) protection.
This list is by no means exhaustive. Actually, the further the distance between the host location and the outsourcer, the more the uncertainties and risks are. These uncertainties and risks can lead to large unexpected costs which offset gains from cheaper labour, or even worse, result in enormous loss to the outsourcer. Therefore, in order to have a complete picture of all the potential costs of the offshore outsourcing projects, companies should adopt a total cost model.
This research aims at developing a total cost model for overseas sourcing/outsourcing in manufacturing industry. To achieve this aim, the following questions will be answered:
- Is it possible to develop a standard cost model encapsulating all the cost items, tangible and intangible, that should be considered when making overseas outsourcing decision in manufacturing industry? What should these cost items be?
- How to deal with risk and uncertainty in this cost model?
- During the overseas outsourcing process, how to measure and control all the costs entailed by the items outsourced?
- What costs are typically underestimated or overestimated in manufacturing companies for their offshoring projects?
The main outcomes from the project will be:
- A total cost framework encapsulating all the cost items (tangible and intangible) for overseas sourcing/outsourcing in manufacturing industry.
- A mechanism to effectively deal with risk and uncertainty for total cost estimation in order to support offshoring decision making in manufacturing companies.
- Through survey in the UK manufacturers with the experience of overseas sourcing/outsourcing, find out the typically underestimated and overestimated cost items during the offshoring process.
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