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"The pitfalls of overseas sourcing
: recognizing and managing the
real-time cost impacts and financial liabilities of complex global supply chains."
Source : GT Nexus
Elusive Profits, Expensive Mistakes: the Pitfalls of Overseas Sourcing
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Global sourcing has become the strategy du jour as enterprises seek to reduce cost of acquiring, building and
selling products in a continual effort to compete more successfully for customers. Yet extending supply lines
overseas brings with it new commercial and operational challenges that are far more complex than before, and
expose the enterprise to an entirely new universe of investments, costs, partners, liabilities, resource
acquisition and management needs.
The result - sourcing initiatives that do not deliver the projected cost savings and/or profits because the risks
and costs of longer, more complex cross-border supply chains were not properly understood, tracked and
This paper will expose hidden pitfalls that organizations encounter when they move sourcing and supply
operations overseas. It will examine historic practices for identifying and understanding the total costs and
lead times required to bring products to market in this extended supply chain model. It will explore the
weaknesses and shortfalls of these historic approaches, why they are ineffective, and why in some cases they
are actually counterproductive, particularly in todays Internet-connected, security-conscious, demand-driven
It will also present a discussion of "next generation" global cost control methodologies and systems. This
section will identify key enablers that underpin these systems, qualitative and quantitative opportunities to be
gained from dynamic, real-time global cost control practices, and the fundamental technology architecture
and differentiators that set these systems apart from past solutions.
Finally, the paper will present "before" and "after" scenarios examining a business case utilizing historic
landed cost practices, contrasted against the same business case executed with dynamic global cost control
methodologies. It will conclude with a review of historical lessons learned, and some thoughts on path to value
utilizing today's advanced, Internet-based, network oriented global cost control systems.
When a consumer pulls an item off the store shelf and heads for the checkout counter, it is generally assumed
that the price of that product reflects an accurate and complete understanding of all the costs that went into its
manufacture and delivery to the store, a reasonable profit for the maker, and a premium or discount according
to market demand.
It's an easy decision for the consumer. If the price is reasonable and the value is recognized, the consumer
makes the purchase. The deal is done, funds change hands, the retailer books another transaction to revenue.
But for the retailer (or distributor) who just sold that product - which may have begun its life 75 days ago on
contract manufacturing line in Shanghai, China, and then made a circuitous journey to that ultimate store shelf
in Stamford, Connecticut - the questions now begin:
- What were my actual costs to buy this product from the supplier?
- What currency was the product purchased in, and what impact did the exchange rate have?
- Did my global supply chain deliver it efficiently; what were the actual costs for freight transportation
and cargo handling fees?
- What were the costs for clearing the goods from Customs for entry into the US?
- What were the taxes and duties paid, when were they paid, and how much?
- What was my expense to finance and carry the inventory?
- What were my liabilities to the supplier, and for all these services and fees, when did they accrue,
when were they paid, were they paid on time?
- Were all these global costs captured and recorded accurately and timely, and then allocated properly
to this particular product, so pricing could be set correctly?
- Did it make a profit?
Welcome to the world of cross-border supply chains and global cost management.
The rush to outsource, hidden pitfalls
As companies come under increasing pressure to compete on price, the rush to "outsource" and embrace cheap
overseas labor and low-cost manufacturing in developing countries has resembled a modern-day version of the
historic California gold rush. The only difference is that the modes of transportation are ships and planes
instead of horses and covered wagons.
Five years into the new millennium, tens of thousands of companies have moved sourcing and manufacturing
overseas. Where in 2000 it was not uncommon for a US-based company to have 10 percent or less of its
products provided by suppliers in another country, today those same companies are going overseas for 50, 70,
even more than 90 percent of their products.
And while the purchasing departments in all those organizations will point with pride to all the money they have
saved their companies, a walk down the hall to the logistics and supply chain group reveals a far different story.
Running a logistics operation from Austin, Texas to Buffalo, New York has far fewer moving parts, fewer and less
complex cost components, and lower impact on financial cash flow than a cross-border supply chain from
Osaka, Japan to Columbus, Ohio. The risks and challenges are an order of magnitude greater.
Independent functions, disconnected systems
Logistics and procurement departments tend to be "siloed" functions that because of their focus, how they are
measured, and how they are compensated, often end up actually working at cross-purposes, with one gaining
or losing at the expense of the other. The purchasing folks are measured by unit price. The logistics team is
measured by transportation spend or total logistics cost as a percent of revenue.
Add to this mix yet another separate management system and employee group - accounts payable - where the
company's bills are received, checked, assigned to cost centers and paid. The resulting picture is one where
many operational processes are running concurrently but have little or no visibility into each other. Yet each has
an impact and a role in how an organization understands, manages and controls its global costs, cash flows and
Lacking a common, integrated cost tracking, measurement and analysis system that "overlays" and connects
these silos, they are like ships passing in the night, mostly unaware of either's presence. Without an
overarching system that provides real-time intelligence into the global "financial supply chain" - and allows
accurate and timely visibility to both global sourcing and logistics costs as they are incurred - disaster is bound
to result. And it's a disaster that typically does not show up on the company's bottom line until weeks or months
later. Several industry reports provide examples of the impact:
- A European retailer looking at the landed cost of health and beauty care products on its shelves
uncovered an astounding 3,500 of 5,200 products that had no contribution or a negative impact on
net profitability. They were in fact dead weight or subsidized by the remaining profitable offerings.
- A diversified Fortune 250 retailer embarks on an initiative to increase from 5 percent to 30 percent a
number of material, component and service activities sourced in four low-cost countries, with a
projected savings in cost of goods sold (COGS) of $200 million. With longer supply lines the initiative
also had to account for logistics costs that could potentially rise to as much as 40 percent of COGS, as
well as the challenge of how to assign these costs back to individual items for profitability analysis.
The projected COGS savings is significantly adjusted downward.
- A manufacturing enterprise successfully expands its global supplier base, saving $20 million, only to
find that logistics costs had increased by $38 million due to increased trucking expenses.
The Historical Landed Cost Concept - understanding shortfalls,
The concept of calculating the "landed cost" of a product has been around for many years. Simply defined,
landed cost is the total sum of all expenses to purchase, transport and import goods from one place to another,
within a country or across continents, including border fees, duties, taxes, currency differentials, transport
costs, insurance, consolidation and / or trans-loading costs, port handling fees, and local delivery charges.
A "landed cost" will therefore involve the calculation of four primary categories:
- Actual cost to purchase the goods
- Transportation fees and handling charges
- Government duties and fees assessed on the goods
- Other logistics expenses
- Customs brokerage
- Loss/Damage Insurance
Early attempts to build landed cost systems suffered from several fundamental
design flaws and weaknesses. Data to power the systems was piecemeal and
isolated, for example:
- Shipment data came from the ocean or air carrier, via a website lookup,
or partially complete integrated shipment status message
- Other logistics cost data had to be obtained from forwarders, 3PLs and
- Product purchase cost came from an ordering system or a supplier's
- Import fee and government cost data came from error prone 3rd party
content providers and/or customs brokers.
- Other fees were left out or inaccurately assigned because they did not
exist in an accessible system, they were not tracked, they required
someone to manually figure out what they were, or they were merely
assumptions or "rough cuts" that prorated a consolidated cost (such as a
"lump-sum" bill for brokerage services over a month's time, with no
specific assignment to PO, shipment or product.)
Then, once the bills started coming in, these were managed in a separate general ledger or accounts payable
system. Reporting delays were a constant issue, data latency and accuracy were continual challenges. The
ability to associate and "split out" particular supply chain costs for assignment to an individual product or
purchase order were problematic, highly manual, inefficient and late. Any knowledge gained about excessive
costs was learned well after the product was delivered, priced and sold - and too late to make any corrective
Unfortunately, these "surprise" costs and extra fees came right off the bottom line, reducing the margin on
the product, or pushing it into a loss.
Traditional methodologies - calculating "to be" or "what was"
The methodologies most common to the industry for developing landed cost tools and information have
generally taken one of two approaches:
- A "to be" approach consisting of projections based on models, trends, historical experience, estimations,
static data and industry averages. This relatively complex approach is typically used by sourcing or
purchasing organizations in an attempt to "put a number" on the financial logistics expense that may be
incurred in the form of freight costs, government duties and import fees for a product being sourced
- A "what was" approach consisting of a roll-up of past charges associated with the purchase and
importing of a product. It is assembled by the buyer, typically well after the product was delivered. It's an
exercise that requires the deciphering of "batch" invoices or bills that contain a sum of charges over a
period of time, and are not reconciled or matched against a particular product, SKU or PO. Collection of
the information is a mostly manual, laborious process of innumerable phone calls, faxes, emails, FedEx
pouches and web site searches. This "rear view mirror" approach is more of an analysis function, as
companies try to figure out what went wrong in their global supply chain and why expected profits from the
cheaper sourcing alternatives did not materialize.
Both of these approaches are flawed and ineffective, particularly in a world where the economic boundaries
between countries have blurred beyond recognition, the pace of commerce and the technologies used to
execute it have evolved and accelerated dramatically, and a buyer is more likely to purchase a product from
someone half a world away, to sell to someone halfway across town.
Example: The "BEFORE" scenario
- Hypothetical $5 billion retailer
- Sources 50% of products globally
- Introducing new product line
- Forecasted quarterly sales: $250 million
- Sourced globally 100%
What happens without dynamic global supply chain cost control:
- Procurement uses spreadsheets to "put a number" on TCO target
- Orders written and financed through L/C
- Marketing kicks into gear and sets retail price at TCO (landed cost + inventory + distribution
cost) + sales cost + 30% margin.
- Asia manufacturing finishes full 12-week selling season, production commences; shipping,
receiving into DCs, distribution to stores for initial store inventory.
- Market launch. Sales take off. Celebrations.
- Projections show mid-season shortages.
- Additional orders placed at factory.
- Airfreight authorized based on great margin.
- Sales start falling off.
- Retailer deploys store-level discount promotions for last 6 weeks of selling season.
- Margin down to 15%.
- Landed cost report is finally assembled.
- True TCO is 150% of target for initial shipments. Will be even higher for express
replenishment shipments - but who knows by how much.
- True margin is barely positive. After discount and air freight the retailer will lose money but
does not know how much. New product line produced a net loss of $20M..40M..50M? Who
- Crisis meetings...
Global Cost Control - The next generation, synching up the
"physical" and "financial" supply chain in real time
With the globalization of today's economies, and the advent of powerful new technologies — which use the
Internet as the communications backbone and as the platform to deliver the enabling software tools — new
solutions are beginning to appear that are expressly designed and built for the intricacies and complexities of
global trade cost management.
These next generation global cost control systems
represent an opportunity to completely change how
companies control, analyze and understand the true costs -
and deliver real profits - from globally sourced products.
What does this mean? For multi-national companies - or
any company with a classic inbound import supply chain -
these new systems enable them to "synch up" their physical
and financial supply chains with sourcing activities, gaining
newfound visibility not only into costs as they occur, but how
they occur and "build" in lockstep with physical supply chain
This model utilizes a Web-hosted business process platform
to dynamically collect, assemble, track and measure global
supply chain cost actuals as they occur - and then accurately
assign those costs to SKUs, product line items or
purchase orders. Manual data acquisition is replaced with
automated, electronic feeds. One-off connections are
replaced with a central data "hub" to which the enterprise
integrates with its global partners and their systems. All
costs are directly linked to elements and events in the
At the heart of these new solutions are several key "enablers" that contribute to a more effective, demanddriven
and accurate global cost management process. These include:
Network Platforms. This is the Web-based infrastructure to connect global trade partners. These networks
of pre-integrated service providers and logistics partners, exist today. The enterprise does not have to
tackle the technical and financial challenge to fund, build, launch, operate and maintain this complex
infrastructure for multi-party electronic data interchange, partner collaboration and workflow control.
Key players are already "wired" to the network, significantly speeding implementation. The ability to
"share the network" reduces the cost for any one participant, making it economical to switch supply chain
transactions to electronic from paper means.
Timeliness. Network platforms improve timeliness by legislating - and managing - connectivity
standards with partners, and providing the structure within which supply chain cost elements can be
captured and presented as they are incurred. Moving to electronic "actual charge" tracking from manually
input data or costing systems can dramatically improve global supply chain cost values, enabling the
enterprise to adjust targets and margin projections before it's too late. These systems also can improve
the accuracy with which costs are allocated at a shipment, product line or SKU level for merchandise.
Data in context. Central to the network is a "unified data hub" that collects, normalizes and associates
cost components into common data objects - a "single version of the truth" - that joins product purchase,
import logistics and transportation activities. Data is obtained through real-time integrated feeds from
partner systems or thorough use of Web forms to input information to the network where a system-tosystem
connection isn't feasible.
On-demand delivery. Built on top of the integration platform and data hub are Web-hosted software
applications, delivered as an on-demand service. No hardware or software is installed on-premise at the
enterprise. These are sophisticated, enterprise-class software applications and data management tools
that aggregate, analyze and present a true global cost picture on a much more timely basis. Since it is
hosted by the technology vendor, with the functionality delivered over the Internet, the system also can be
implemented faster, exposes the enterprise to less risk, and requires a smaller investment to get started.
The takeaway: With these new network platforms, unified data hubs and on-demand software services, the
notion of "as is" reporting or "actual" cost tracking is far less complex and far more accurate than past
practices which attempted to "kluge" together disparate pieces of latent information, from different systems
and content providers.
Example: The "AFTER" scenario
- Hypothetical $5 billion retailer
- Sources 50% of products globally
- Introducing new product line
- Forecasted quarterly sales: $250 million
- Sourced globally 100%
What happens with dynamic global supply chain cost control:
- Procurement uses experience values from the global supply chain cost management
system to set cost targets; reviewing actual cost of similar products guides targets.
- Orders written, sourced, financed through L/C's.
- Marketing sets the retail price based on target cost data.
- Overseas manufacturing produces full 12-week selling season, begins initial shipping.
- After one week of shipments, global cost control system flags higher than expected
freight charges for goods from Bangladesh. Logistics investigates; finds ineffective
consolidation, agent fees not considered in targets.
- Routing reset through better consolidation point. Target cost updated with agent fees.
- Three weeks later, global cost control system flags higher than expected duties and
inland transportation costs. Research discovers wrong product classification used by
broker. Error corrected, excessive duties recovered. High inland transport costs due to
congested west coast ports and surging fuel prices. Targets adjusted again.
- Goods distributed to stores for initial inventory. Market launch commences with updated
(higher) prices, revised margin expectations (20%), and adjusted marketing budget.
Sales are solid. Demand projections show inventories sufficient through end of selling
season. No additional manufacturing orders placed.
- Sales begin easing halfway through season. Global cost control system shows updated
figures, total margin of 21%. Targeted supply chain cost savings measures were
successful. Marketing devises discount campaign to clear inventory toward end of season
- at positive 5% margin.
- Total margin for new line over the full selling season: 18%. New product line produces $45
million net profit.
- Celebrations ...
Advantages of dynamic global cost control systems
Integrated global cost control systems present significant advantages and can be the source of qualitative as
well as quantitative differentiation for a global enterprise. Major opportunity areas include:< /p>
Improve target costing - Accurately understanding target costs - the expected full cost to purchase
goods from an overseas supplier and get them to market - is the key to profits. Dynamically tracking
actual cost against previously set targets quickly uncovers targets that are unrealistic or inaccurate. Early
visibility into the delta between these two allows shippers to quickly adjust targets and modify plans for
downstream product pricing and marketing campaigns. By reducing from months to weeks or even days
the discovery of unrealistic targets, companies can save millions in lost margins.
Dynamically report and manage costs - By
implementing a global platform that automates
and centrally manages global logistics data
collection and consolidation, substantial
reductions in cost reporting delays are made
possible. Traditional reporting solutions suffer
from latency problems and are good only for
post-audit or "after the fact" analysis. Issues
that may be uncovered relate to logistics activity
that's long since been completed; retroactive
resolution is not possible. With dynamic cost
reporting, lead-time for actuals can be cut from
days or weeks to hours. Supply chain issues are
exposed early. Enterprises can takes steps to
respond quickly and correct them before
excessive costs are incurred.
Track the liability pipeline - As globally sourced goods are manufactured and then start their journey to
market, the enterprise incurs liabilities for payment of goods and services. With actual global cost
tracking, financial managers can literally "watch the meter build" as sourcing and supply chain milestone
activities are executed, and the costs are incurred. This intelligence can be used better assess obligations
as well as current and future cash flow needs. The integrated global cost control system also supports key
financial management processes that underpin accurate total cost management. These include:
- Cost allocation -- Costs can be automatically allocated by the system in the proper proportion to the
right shipment, order, product line item or SKU. No "orphan" costs are left out and the resulting
global landed cost calculation is accurate.
- Cost audit -- Costs can be automatically audited in the system. For example freight costs can be
matched against transportation contracts, duties against item classifications, first cost against
commercial invoice or original purchase order.
- Cost timing -- The time in which a certain liability (cost) was incurred can be audited or matched by
the system against a corresponding event in the physical supply chain. For example, transfer of title
to goods (and resulting payment) can be associated with or triggered by related events in the
"physical" supply chain, such as Forwarder Cargo Receipt, Vessel On-Board or Vessel Arrival.
Experience has taught us that outsourcing and strategic relocation of manufacturing and supply bases to lower
cost countries can help enterprises reduce cost of goods sold. However, history also proves that the savings
from those sourcing initiatives can quickly evaporate without effective technology platforms and systems
capable of managing longer and more complex supply lines, and the larger, more extended financial commitment
required to operate them. It's the holy grail of global supply chain management.
As goods move through the supply chain, a global cost control platform captures costs dynamically as they
are incurred, aggregates them and then provides the tools to leverage that information.
Tangible benefits in global sourcing and cross-border supply chain performance, as well as measurable
improvements in bottom-line profitability can be obtained by investing in and deploying today's advanced,
Internet-based global cost control systems. These herald the next generation of landed cost management,
introducing new measures of value and benefit through connected networks that synch up the physical and
financial supply chain, and deliver new-found visibility and control over a broad swath of global sourcing, trade
and logistics operations.
"As more companies are competing on price, it is becoming even more important to know
our true inventory costs accurately and immediately. This gets complicated by varying costs
like freight, the duty imposed on imported products, and of course the exchange rate. The
trick is to know our real costs at the time of selling..."
President of a tier 1 Japanese automotive supplier
For more information, contact:
GT Nexus, Inc.
1301 Marina Village Parkway
Alameda, CA 94501