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Don’t let your offshoring become a shipwreck
- 1. DON’T LET YOUR OFFSHORING BECOME A SHIPWRECK Ian Bradley MBA, CMA, CFM, CPA(NC)
- 2. DENMARK • Home of the origanal Vikings. – Hint not Minnesota • Home to Hans Christian Anderson – Author of the “Little Mermaid” • Currency is the Krone
- 3. PART 1 – Is off shoring cost PART 2 – What are the risks effective? & how do we mitigate them
- 4. PART 1 IS OFF SHORING COST EFFECTIVE?
- 5. LEARNING • What is Offshoring? OBJECTIVES • Is Offshoring cost effective? – What is your strategy. PART 1 – 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
- 6. WHAT IS OFF SHORING? • Locating operations overseas – Foreign supplier – Foreign subsidiary • Outsourcing services overseas
- 7. WHERE DO YOU WANT TO GO?
- 8. OFFSHORING STRATEGY Set up manufacturing Sell to the Set up a local market distribution center Direct from vendor Import using agent
- 9. BELGIUM • Scene of Napoleon's last defeat - Waterloo • 800 kinds of beer made • Home to Godiva chocolate
- 10. WHAT TO OFFSHORE? Manufacturing Service Overhead
- 11. WHY? MANUFACTURING SERVICES OVERHEAD Cost Reduction Cost Reduction IT Materials Labor force HR Processes Customer New Markets Service Accounting
- 12. WHY? MANUFACTURING SERVICES OVERHEAD Cost Reduction Cost Reduction IT Materials Labor force HR Processes Customer New Markets Service Accounting
- 13. CULTURE • Attitude to workforce reductions • Ethical stance
- 14. SPAIN • The catholic church has been in construction since 1882 • Home to possibly the greatest ever club soccer team • Home to the 1992 Olympics
- 15. PRODUCT COSTING
- 16. RELEVANT COST - LOOK AT THE BIG PICTURE Relevant Cost • Material • Labor • Indirect materials Remaining • Variable overhead • Stepped fixed cost True savings
- 17. 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
- 18. MAKE OR BUY XYZ MACHINE HOURS SAVED: ESTIMATED VOLUME 25,000 SCREW MACHINE S1 91 TOOLING COST SCREW MACHINE S2 35 VIBRATORY & BOX 19 M SHOP- A4 30 M SHOP- G&D 100 ESTIMATED CONTRIBUTION CHINA $ 161,750 POLISHING - EMERY 301 POLISHING - AUTO BUFF 87 ESTIMATED SAVING TO US $ 13,000 PLATING 257 TOTAL CONTRIBUTION TO T&S $ 174,750 ASSEMBLY 1963 PRODUCT XYZ LABOR PORTION (SCH 2) $ 55,883 TOTAL IMPACT 2883 COST SAVING Cost to Buy Purchase Price of T&S Shanghai Non-refundable VAT - 8% $ 23.97 1.92 China mark up Excl non-refundadable VAT 6.47 China Transfer Price (at 35% mark up) 32.36 Duty & Inbound freight 5% 1.38 Total Cost to T&S US 33.74 Cost to Make Std material Cost 32.09 Chip value -0.73 Actual material cost 31.36 Variable Conversion: Screw Machine: Cost per run hour 34.78 Hours per piece 0.0058 Run hour cost per piece 0.20 Machine Shop Cost per run hour 34.78 Hours per piece 0.0052 Run hour cost per piece 0.18 Polishing Run hour activity cost 30.86 Hours per piece 0.0155 Run hour cost per piece 0.48 Plating: Run hour activity cost 43.05 Hours per piece 0.0103 Run hour cost per piece 0.44 Assembly: Run hour activity cost 19.45 Hours per piece 0.0785 Run 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
- 19. INVENTORY INVESTMENT BEFORE AFTER Overseas •2 Weeks •5 days Subsidiary Manufacturing Ocean •5 Weeks •2 days Finished Goods US •2 Weeks Inventory
- 20. T & S BRASS AND BRONZE WORKS, INC. April 5, 2012 CHANGE IN VENDOR WORKSHEET REASON FOR CHANGE: OST C PRODUCT XYZ TR T&S SHANGHAI RETURN ON COST SAVINGS: UNIT COST 34.28 23.97 INVESTMENT VAT TAXES IMPORT DUTIES TOTAL COST - - 34.28 1.92 1.38 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
- 21. CONTINUALLY REVIEW REAL OPTIONS • Assumptions change • Outsourcing costs change • New options appear • Risks increase
- 22. RE-SHORING • Transportation Goods, Electrical Equipment, and Furniture Are Among BOSTON Sectors Most Likely to Gain Jobs as U.S. Manufacturing Returns, Predicts The CONSULTING Boston Consulting Group 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.”
- 23. ENGLAND • Home of time • Winners of the 1966 World Cup • Home to 2012 Olympics • Greatest country in the world • But the weather sucks
- 24. PART 2 WHAT ARE THE RISKS & HOW DO WE MANAGE THEM?
- 25. LEARNING • What is Risk Management OBJECTIVES • Risk Appetite PART 2 • What are the risks? – Political Risk – Business interruption – Supplier – Exchange Risk • Managing Risk
- 26. ERM COSO FRAMEWORK Monitoring Activity 2 Activity 1 Information & Communication Unit B Control Activities Unit A Risk Assessment Control Environment
- 27. RISK APPETITE • Culture • Strategic Objectives • Financing • Industry
- 28. RISK MATRIX Very Likely Acceptable Unacceptable Unacceptable risk Risk Risk Medium High Extreme 2 3 5 Likely Acceptable Acceptable risk Unacceptable Likelihood risk Medium Risk Low 2 High 1 3 Unlikely Acceptable Acceptable risk Acceptable risk Low risk Low 1 Medium 1 2 What it the Minor Moderate Major chance it will happen? Impact How serious is the risk?
- 29. SHANGHAI CHINA
- 30. POLITICAL
- 31. POLITICAL RISK MANAGEMENT • Avoid the country • Require a higher return • Diversify • Keep capital low • Continually monitor situation
- 32. BUSINESS INTERRUPTION • Political – Strikes • Accidental – Fire / flood • Natural disaster – Tsunami – Tornado – Hurricane – Earthquake
- 33. MANAGING BUSINESS INTERRUPTION RISK • Insurance • Diversify purchasing • Higher safety stocks • Retain internal capabilities
- 34. SUPPLIER RISK • Poor quality • Inferior material • Late delivery • Inability to return product • Rework • Damage to brand
- 35. 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
- 36. EXCHANGE RISK • Transaction Exposure • Translation Exposure
- 37. MANAGING EXCHANGE RISK • No management • Buy in own currency • Natural Hedge • Forward Contracts • Futures Contracts • Options • Swaps
- 38. GERMANY
- 39. THANK YOU For more information contact: Ian Bradley, CMA, CFM, CPA, MBA Email: IBradley@TSBrass.com Cell: 864-320-4897 Linkedin: http://www.linkedin.com/in/ianbradley