Automotive Local Sourcing: Will Total Cost Focus Win Over Unit Cost at Jaguar Land Rover? (Part 3)

In the first two posts in this series (Part 1 and Part 2), I examined a handful of factors that play -- or should play -- into total cost calculations for global sourcing. Criteria such as these will be critical when Jaguar Land Rover figures out its optimal supply strategy as it doubles, rather than eliminates, production at one of its facilities in the UK, a plant that currently has a strong regional supply base. In this final post in the series, I'll share a few more items that should factor into total cost across any manufacturing operation, especially high-volume, low-mix environments such as automotive. Now on with the total cost list:

Size -- the relative size of a part or component has little to do with total cost directly, but as a general rule, it nearly always proves the case that if an item can fit in a shoebox (and does not bulk out too early from a logistics perspective) then it's at least a candidate for global sourcing. If it's larger than a shoebox, be careful.

Quality -- Automobile manufacturers have gotten much better in recent years at improving initial product quality. If you look at survey data, the number of defects per vehicle has dropped significantly and usually on a somewhat consistent basis over the past two decades. And this is despite the rise of global sourcing. Yet few companies have the ability to easily analyze warranty claims over a four or five year period based on where a given part or component came from (let alone the specific supplier facility). Companies must factor into account quality that extends throughout the warranty period -- not just initial defect rates -- when looking at potential global sources of supply.

Inventory carrying costs -- Inventory carrying costs typically increase at incremental rates when companies change from local to regional to national to near-shore to global sources of supply. The reason is simple. The more distant a supplier, the more inventory you need to keep on hand on ensure that a line does not go down. In the case of automotive firms, global suppliers should be willing to warehouse or carry inventory locally to ensure adequate supply (or should pass along additional price concessions to ensure that manufacturers, if they're not set up for just in time programs, can carry more inventory themselves.

Logistics -- Everyone knows it costs more to move a container from a distant port than it does to put one on a truck or train (not to mention using two or three of the modes within the same point-to-point model). But the variability of cost, owning to available capacity and competition, surcharges and other areas should factor into a global sourcing equation. Even with global freight at relatively low price levels today, manufacturers should budget for material price variance. Moreover, don't forget the hidden high tax of air freight (which can be required at any point in the supply chain) to avoid production shutdowns when lead times increase and/or available inventory levels drop.

Have we missed any of the big total cost global sourcing factors in automotive manufacturing in this series? I can think of a few more (e.g., tooling costs) but if we're remiss in the most obvious ones, please post a comment.

Jason Busch

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