In the first post in this series, I shared the story of how Jaguar Land Rover is planning to keep a production facility in the UK, along with at least part of its regional supply base. The topic provides an ideal launch point to examine the concept of total cost management within the manufacturing sector and why regional (or near-shore) suppliers can often be more competitive than many believe. It's also one of the reasons that so many automotive and industrial manufacturers that went to China, India, Brazil and other lower cost regions looking to play the labor and currency arbitrage game (for export) have found in recent years that their past decisions did not provide as much savings as first thought and more recently, how the concept of low cost country sourcing (LCCS) has become a misnomer -- a highly risky misnomer, to be exact.
Where do manufacturers typically get burned on cost when looking halfway around the world? There are a number of areas, many of which procurement has poor visibility into when they embark on their initial costing and sourcing initiatives. These include:
Currency -- Volatile current markets can wipe out savings for companies that do not hedge directly or indirectly. Even for contracts denominated in the import market currency, suppliers will inevitably come back and ask for price changes if their currency appreciates materially.
Raw material costs, lead times, financing and availability -- it's an incorrect assumption that many companies believe that steel, copper, aluminum, coal (for power plants) are all available at the same "world price." They're often not (regional prices can vary 5 or 10%) and lead-times and inventories can vary materially from country to country (if you're curious about this phenomena, you can register for MetalMiner InDX and see for yourself). Moreover, many suppliers in emerging markets like China don't have the available capital -- or are unable, owing to suppliers -- to lock in forward pricing for more than a very short time window.
Customs/taxes/tariffs/duties/VAT rebates – Both import and export duties (and in certain cases, rebates) are often more volatile than many sourcing professionals are led to believe. The "shot heard round the global sourcing world" when procurement organizations originally realized the China price had only one direction to move happened a few years ago when the VAT rebate policy for many lower-value added components, parts and components changed with little notice, eating into the margins of suppliers who had come to expect much of their profit in these export rebate kickbacks. Even more so than currency movements, this VAT rebate change caught everyone's attention (as have import duty changes in other areas as well).
Stay tuned as we continue this investigation into total cost factor that can make local, regional and near-shore suppliers in the automotive industry that much more attractive from a cost standpoint. Hopefully for you global sourcing pros this refresher is not overly boring. I personally continue to find it surprising how little skill many companies show at calculating global cost.