2. A Different Perspective
This article, regarding offshoring, posits that hidden
costs and changes to expected costs may make it more
advantageous for firms to scale back offshoring
operations and consider near-shoring.
3. Why Offshore?
Offshoring has become very popular in today’s global
economy, especially in certain sectors
Most businesspeople are aware of some of the benefits
(lower labor costs, primarily)
There are also well-known downsides to offshoring
(loss of domestic jobs, quality and standards issues)
4. Accounting Refresher
When executives decide whether or not to
begin, continue, or scale back offshoring
operations, costs must be considered
Cost of goods sold
Costs are allocated differently
5. Landed Costs
Executives must determine “total landed costs”: the
sum of all costs associated with making and delivering
products to the point where they produce revenue (i.e.
where they are sold).
Landed costs include raw materials, carrying
inventory, managing product returns, and other
hidden charges*
These are incorporated into cost of goods sold and
total supply chain costs
6. Hidden Costs
In addition to the “normal” costs, when offshoring
there are some “hidden” expenses which should be
considered and allocated
Oil prices (in multiple places in the supply chain)
Example: it costs $100 to ship a ton of iron from Brazil to
China—more than the cost of the mineral
Wage inflation and a weak dollar
Wage differential in Mexico vs. China
7. Total Supply Chain Costs
Transportation costs, including fuel surcharges
Product groups—different product groups incur different costs
(customs classifications, volumes, degree of quality controls, size and
weight, perishable
Customs tariffs, duties, and taxes
Inventory (long supply chains increase capital requirements)
Time (cash-to-cash cycles)
Quality
Returns and added product work
Allocate technology costs to product groups (international supply
chains require two times as much information technology as domestic)
Internal controls
Selling, general, and administrative expenses (travel time, global
communications, outside experts, and even litigation)
8. Handout: Graphs
Handout from Case 3
We will take a look at two graphs which show visually
Wage inflation
Cost of manufacturing
The article acknowledges that curves are shifting due
to economic fluctuations
9. Example
Total landed cost for midrange server, compared
between Asia and U.S.
In 2003 would have represented 60% labor savings
36% of these labor savings were offset by
freight, shipping-related charges, inventory, product
returns
Indexed to $100, that gave Asia a $64 landed cost
advantage
After factoring in higher labor and freight costs the
former savings have turned into a $16 burden
Labor savings now are only $45 due to wage inflation
10. Suggestions
Article suggests executives think about near-shoring
Firms must consider long-term geographic
distribution of demand for their products
Think about the importance of speed, availability of
skilled talent, potential for further productivity gains
in Asia, one-time transition costs, local import and tax
implications, and organizational interfaces
11. Conclusion/Opinion
Offshoring has obvious benefits and pitfalls
Hidden costs
Shift from pure cost savings to value
Costs and benefits seem to depend on product group
The author examines a few points that firms may not
have previously given enough weight to. It should be
interesting to see how globalization and evolving
economies impact offshoring in the future.
13. Discussion Question
What do you think are some additional advantages and
disadvantages of near-shoring?
Do you think there is anything the authors of this article
overlooked or downplayed when making their point?
14. References
Case 3 “Time to Rethink Offshoring?”
http://www.ingesfor.com/BA537/Cases/Case%203_1/cas
e%203_1.pdf
10 Tips for Understanding Total Landed and Delivered
Costs
http://www.joc.com/2010/10-tips-understanding-total-
landed-and-delivered-costs
Explain cost of goods sold, for those who have not taken accounting. There are different ways of calculating COGS (first in first out, specific identification, or average cost) which include expenses such as [parts, labor, overhead] raw materials, labor, supplies or additional material, supervision, quality control, use of equipment, and other overhead costs.
We will talk about hidden costs in the next slide
Traditionally we think of oil prices affecting transportation of the finished good, but globally sourced raw materials must be transported to the production site as well. The price of transporting the raw materials may be more than the actual value of the material.Wage differential in Mexico vs. China: has narrowed significantly. In 2003 Mexican workers made over twice what their Chinese counterparts did; today that gap has narrowed to 1.15
