Overseas Sourcing and Business Case Considerations

By Paul D. Ericksen
Senior Supply Chain Advisor to CAPS Research

Corporate decisions are made based on business case deliberations. It is critical that the metrics and considerations applied are indicators of significantly increased competitiveness. A business case for both domestic sourcing and overseas sourcing can be made. The primary factor in both cases is related to the customer. 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 completed?

Factoring In Supplier Agility

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 “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 is whether or not they are capable of supporting the market dynamics as described above. However, a capability for agile response is often not considered during the supplier selection process. Instead, the primary selection criteria is piece-price. As a consequence, piece price becomes the dominant driver in building the business case for sourcing.

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

Impact of Changing Market Dynamics

While the piece price will always be a factor in source selection, there are other important factors that should be part of the decision not associated with getting a purchased part to a customer’s receiving dock.

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, forecast errors 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 positively impact profits as a result of improved product availability and incremental sales.   Conversely, lost sales and lost profits may result from long component lead times and unavailability of materials when piece-price considerations override lead time risks.

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.

CAPS is a B2B nonprofit research center serving supply management leaders at Fortune 1000 companies. CAPS Research inspires leaders with profound discovery and executable strategies to shape the future of supply management. Research reveals the destination, benchmarking charts the course, and networking creates the path to transformation. All CAPS offerings are sales-free, bias-free, and practitioner-driven. CAPS was established in 1986 at the W. P. Carey School of Business at Arizona State University in partnership with the Institute for Supply Management. Learn more at www.CAPSResearch.org.

About the author

CAPS Research