Executive Briefings

The ABCs of Total Landed Cost Modeling

Mike Jones, president of St. Onge Co., explains the value of total landed cost modeling, and how it's affecting decisions to offshore manufacturing activities.

In coming to understand the true cost of offshoring one's manufacturing activities in Asia, versus locating them closer to the U.S. in places such as Mexico, there are many "quantitative and qualitative" considerations to keep in mind, says Jones. The complexity of the equation "is why a lot of companies don't do it very well."

Often manufacturing concerns take precedence, eclipsing logistics and distribution factors, which are "minimized if considered at all." As a result, many companies are unaware of the hidden costs involved in outsourcing manufacturing to a country in Asia with low labor costs.

Wages do drive a lot of the decision, but other factors must be considered as well. They include local regulations, the ease of doing business in a distant country, and the cost of moving finished goods to market. Many companies fail to include downstream transportation in their deliberations. As a result, they're forced to resort to high-priced expedited options when product is delayed.

Also often overlooked are downstream inventory considerations. Offshoring usually involves longer lead times and higher order minimums, forcing companies to increase buffer inventories close to their customers.

Jones decries the "herd mentality" that has caused many companies to send their manufacturing offshore, without a full consideration of supply-chain costs. "It's an amazing number, who have made offshoring decisions in haste, or because their customers are doing it."

Other factors to keep in mind include the physical attributes of a product, as related to its value, and how quickly inventories of the item in question can be turned. Two products that appear to be similar might have vastly different line-fill rates, Jones says.

"You've got to go beyond the spreadsheet," he says, "and bring analytics to bear."

To view video in its entirely, click here


Keywords: supply chain, supply chain management, inventory management, inventory control, global logistics, transportation management, logistics outsourcing, logistics services, supply chain services, sourcing solutions, total landed cost

In coming to understand the true cost of offshoring one's manufacturing activities in Asia, versus locating them closer to the U.S. in places such as Mexico, there are many "quantitative and qualitative" considerations to keep in mind, says Jones. The complexity of the equation "is why a lot of companies don't do it very well."

Often manufacturing concerns take precedence, eclipsing logistics and distribution factors, which are "minimized if considered at all." As a result, many companies are unaware of the hidden costs involved in outsourcing manufacturing to a country in Asia with low labor costs.

Wages do drive a lot of the decision, but other factors must be considered as well. They include local regulations, the ease of doing business in a distant country, and the cost of moving finished goods to market. Many companies fail to include downstream transportation in their deliberations. As a result, they're forced to resort to high-priced expedited options when product is delayed.

Also often overlooked are downstream inventory considerations. Offshoring usually involves longer lead times and higher order minimums, forcing companies to increase buffer inventories close to their customers.

Jones decries the "herd mentality" that has caused many companies to send their manufacturing offshore, without a full consideration of supply-chain costs. "It's an amazing number, who have made offshoring decisions in haste, or because their customers are doing it."

Other factors to keep in mind include the physical attributes of a product, as related to its value, and how quickly inventories of the item in question can be turned. Two products that appear to be similar might have vastly different line-fill rates, Jones says.

"You've got to go beyond the spreadsheet," he says, "and bring analytics to bear."

To view video in its entirely, click here


Keywords: supply chain, supply chain management, inventory management, inventory control, global logistics, transportation management, logistics outsourcing, logistics services, supply chain services, sourcing solutions, total landed cost