Select a component or finished good that you are familiar with that is sourced f

Question

Select a component or finished good that you are familiar with that is sourced from a low-cost country. Develop a total cost value proposition to evaluate the potential of continuedsourcing from low-cost country. For each of the cost components(material, manufacturing, transportation, packaging, inventory, handling, damage,risk,security), identify the major trade-offs associated with sourcing locally versus sourcing from a low-cost country. Based on your assessment of the current environment in your country, what is the direction for each of these cost components over the next five years, and what is the likely trend regarding low-cost-country sourcing?

Explanation / Answer

The component selected for the purpose of this evaluation is engine piston which is a key component in an automobile. The cost advantage for procurement from a low cost country (China in this case) is as much as 50% when compared to local manufacturing (in India). The factors considered in the total cost value are material, manufacturing, transportation, packaging, inventory, handling, damage,risk,security

Material - Raw material cost is considerably less in the low cost country which significantly reduces the import costs. The raw material used includes various grades of steel which need to be imported for local manfacturing which increases the cost.

Manufacturing - The capital expenditure involved in setting up a plant in China is lesser than in India. Other related equipment such as machines, tools, dies etc are also easily available. China has specialized in mass manufacturing components. The scale of the factories operated in China are over 10 times compared to the ones in India. This significantly reduces the fixed cost allocation and hence the total cost. There were concerns in the intital years regarding quality of components from China but the same has been addressed. Non input related costs such as labour and power are more or less similar in the two countries

Transportation - Importing from China to India is not significantly difficult. The only drawback is the time taken for the delivery of components once the order is placed factoring in the delays in transit, customs clearance, etc.

Inventory - A related aspect of the transit time delays is the increase in inventory levels that need to be maintained. This calls for a strong demand forecast other wise the bullwhip effect of supply chain will lead to a large build up in inventory

Damage / Security - There are chances of transit damage but the same can be covered through insurance.

Considering the case of India, there has been a strong push towards local manufacturing but the same is yet to yield ground level results. There will not be any significant reduction in material costs since the same will have to be imported even in the future. There may be import subsidies but the impact would be less.It would be difficult for most countries to match the scale of operations in low cost countries. There are chances that the local industries are given support from the Government thus increasing the components manufactured locally. Procurement from local sources is always beneficial from the inventory point of view since the philosophy of JIT can be used in manufacturing thus dramatically increasing the efficiency. But in case of a high demand product, maintaining an inventory and leveraging on bul purchase would be a better decision

Considering the above factors, it can safely said that there will not be a major shift in the sourcing patterns from low cost countries. Fall in demand is the only reason that can make the sourcing from low cost countries slow down

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