don’t let your offshoring become a shipwreck
TRANSCRIPT
DON’T LET YOUR OFFSHORING BECOME A SHIPWRECK
Ian BradleyMBA, CMA, CFM, CPA(NC)
• Home of the origanal Vikings. – Hint not Minnesota
• Home to Hans Christian Anderson
– Author of the “Little Mermaid”
• Currency is the Krone
DENMARK
PART 1 – Is off shoring cost effective?
PART 2 – What are the risks & how do we mitigate them
IS OFF SHORING COST EFFECTIVE?
PART 1
• What is Offshoring?• Is Offshoring cost effective?
– What is your strategy.– Role of company culture.– Why are these important– What costs do you truly save– What costs do you incur– What is your investment– Will you get a return on
investment– Continually review
LEARNING OBJECTIVES PART 1
• Locating operations overseas– Foreign supplier– Foreign subsidiary
• Outsourcing services overseas
WHAT IS OFF SHORING?
WHERE DO YOU WANT TO GO?
Import using agent
Direct from vendor
Set up a distribution center
Set up manufacturing
Sell to the local market
OFFSHORING STRATEGY
• Scene of Napoleon's last defeat - Waterloo
• 800 kinds of beer made
• Home to Godiva chocolate
BELGIUM
Manufacturing Service Overhead
WHAT TO OFFSHORE?
WHY?
MANUFACTURINGCost ReductionMaterialsProcessesNew Markets
SERVICESCost ReductionLabor force
OVERHEADITHRCustomer ServiceAccounting
WHY?
MANUFACTURINGCost ReductionMaterialsProcessesNew Markets
SERVICESCost ReductionLabor force
OVERHEADITHRCustomer ServiceAccounting
CULTURE
• Attitude to workforce reductions• Ethical stance
• The catholic church has been in construction since 1882
• Home to possibly the greatest ever club soccer team
• Home to the 1992 Olympics\
SPAIN
PRODUCTCOSTING
Relevant Cost
Remain-ingTrue sav-ings
RELEVANT COST - LOOK AT THE BIG PICTURE
• Material• Labor• Indirect materials• Variable overhead• Stepped fixed cost
WHAT COSTS DO YOU INCUR?
• Material• Freight• Duty• Taxes• Customs fees• Quality• Interest• Exchange
gains/losses• Expediting
Source: SMA – Managing the total costs of global supply chains
PRODUCT XYZ COST SAVING
MACHINE HOURS SAVED:ESTIMATED VOLUME 25,000 SCREW MACHINE S1 91TOOLING COST SCREW MACHINE S2 35
VIBRATORY & BOX 19M SHOP- A4 30M SHOP- G&D 100
ESTIMATED CONTRIBUTION CHINA 161,750$ POLISHING - EMERY 301POLISHING - AUTO BUFF 87
ESTIMATED SAVING TO US 13,000$ PLATING 257TOTAL CONTRIBUTION TO T&S 174,750$ ASSEMBLY 1963
LABOR PORTION (SCH 2) 55,883$ TOTAL IMPACT 2883
Cost to Buy $Purchase Price of T&S Shanghai 23.97Non-refundable VAT - 8% 1.92China mark up Excl non-refundadable VAT 6.47China Transfer Price (at 35% mark up) 32.36Duty & Inbound freight 5% 1.38Total Cost to T&S US 33.74
Cost to MakeStd material Cost 32.09Chip value -0.73Actual material cost 31.36
Variable Conversion:Screw Machine:
Cost per run hour 34.78Hours per piece 0.0058Run hour cost per piece 0.20
Machine ShopCost per run hour 34.78Hours per piece 0.0052Run hour cost per piece 0.18
Polishing Run hour activity cost 30.86Hours per piece 0.0155Run hour cost per piece 0.48
Plating:Run hour activity cost 43.05Hours per piece 0.0103Run hour cost per piece 0.44
Assembly:Run hour activity cost 19.45Hours per piece 0.0785Run hour cost per piece 1.53
Outside Processing 0.07
Total variable cost 34.26
Opportunity (Cost) saving to Buy to T&S US 0.52
T&S consolidated savings (cost) 6.99
MAKE OR BUYXYZ
INVENTORY INVESTMENT
BEFORE
Manufacturing
• 5 days
Finished Goods
• 2 days
AFTER
Overseas Subsidiary
• 2 Weeks
Ocean
• 5 Weeks
US Inventory
• 2 Weeks
PRODUCT XYZ RETURN ON INVESTMENT
T & S BRASS AND BRONZE WORKS, INC. April 5, 2012 CHANGE IN VENDOR WORKSHEET
REASON FOR CHANGE:COST
TR T&S SHANGHAICOST SAVINGS:
UNIT COST 34.28 23.97 VAT TAXES - 1.92IMPORT DUTIES - 1.38 TOTAL COST 34.28 27.27 ESTIMATED ANNUAL USAGE 25,000 25,000
TOTAL ANNUAL COST 857,000 681,750
COST SAVING 175,250
INVESTMENT:
INVENTORY
UNIT COST 34.28 27.27 EST QUANTITY ON HAND 3,697 33,274
INVESTMENT IN INVENTORY 126,733 907,382
TOOLING N/A -
TOTAL INVESTMENT 126,733 907,382
CHANGE IN INVESTMENT 780,649
PAY BACK PERIOD (MONTHS) 53.5
CHANGE VENDOR: NO
CONTINUALLYREVIEW
REAL OPTIONS
• Assumptions change• Outsourcing costs change• New options appear• Risks increase
• Transportation Goods, Electrical Equipment, and Furniture Are Among Sectors Most Likely to Gain Jobs as U.S. Manufacturing Returns, Predicts The Boston Consulting Group
• “With Chinese wages rising at 15 to 20 percent per year and the value of the yuan continuing to appreciate against the dollar, the report predicted that the once-enormous labor-cost gap between Chinese coastal provinces and certain lower-cost U.S. states will shrink to less than 40 percent by around 2015.”
RE-SHORING
BOSTONCONSULTING GROUP
• Home of time
• Winners of the 1966 World Cup
• Home to 2012 Olympics
• Greatest country in the world
• But the weather sucks
ENGLAND
WHAT ARE THE RISKS & HOW DO WE MANAGE THEM?
PART 2
• What is Risk Management
• Risk Appetite• What are the risks?
– Political Risk– Business interruption– Supplier– Exchange Risk
• Managing Risk
LEARNING OBJECTIVES PART 2
ERM
COSO FRAMEWORK Monitoring
Operation
sFinancia
l
Reportin
gComplian
c
e
Information & Communication
Control ActivitiesRisk Assessment
Control Environment
Unit
AUn
it B
Activ
ity 1
Activ
ity 2
• Culture• Strategic Objectives• Financing• Industry
RISK APPETITE
Very Likely Acceptable risk
Medium2
UnacceptableRiskHigh
3
Unacceptable
RiskExtreme
5Likely Acceptable
riskLow
1
Acceptable riskMedium
2
Unacceptable
RiskHigh
3
Unlikely Acceptable riskLow
1
Acceptable riskLow
1
Acceptable risk
Medium2
What it the chance it will
happen?
Minor Moderate Major
RISK MATRIXLik
elih
ood
ImpactHow serious is the risk?
SHANGHAICHINA
POLITICAL
POLITICAL RISK MANAGEMENT
• Avoid the country• Require a higher return• Diversify• Keep capital low• Continually monitor
situation
BUSINESSINTERRUPTION
• Political – Strikes• Accidental
– Fire / flood• Natural disaster
– Tsunami– Tornado– Hurricane– Earthquake
MANAGING BUSINESS INTERRUPTION RISK
• Insurance• Diversify purchasing• Higher safety stocks• Retain internal capabilities
SUPPLIER RISK
• Poor quality• Inferior material• Late delivery• Inability to return product• Rework• Damage to brand
MANAGING SUPPLIER RISK
• Audit your supplier regularly
• Have a contingency plan• Have employees on site• Have detailed contracts• Test product in country• Air freight• Safety stock
EXCHANGERISK
• Transaction Exposure• Translation Exposure
MANAGING EXCHANGE RISK
• No management• Buy in own currency• Natural Hedge• Forward Contracts• Futures Contracts• Options• Swaps
GERMANY
For more information contact:
Ian Bradley, CMA, CFM, CPA, MBAEmail: [email protected]: 864-320-4897Linkedin: http://www.linkedin.com/in/ianbradley
THANK YOU