For DDS Logistics CEO Jérôme Bour, the distance of a production or supply location is a key factor that must be taken into account when looking at a company’s general strategy.
Defining the economic stakes of transport first
The political will toward France’s “Industrial recovery” has led many companies to question the sensibility of offshoring production or supplies to countries with cheaper labor.
“It is true” Jérôme Bour stresses, “that those countries often have lower direct labor costs. Although the average wages are increasing significantly in China, there are many countries in the South Asia area such as Bangladesh or Vietnam where labor is still cheap. However
before making any decision, it is important for a company to fully appreciate the specific logistical constraints of transport from those countries.”
The financial consequences of such a decision can be the opposite of what was intended in the first place, which is why it is crucial to calculate accurately the costs of long distance transport logistics.
It is clear that sound financial analysis demands such precaution when you know that sourcing costs, for instance in China, account on average for 30 to 50% of a product’s cost price, whereas they range from 3 to 10% if the company goes for local sourcing!
“Being aware of the variety of factors, which is the very source of defects in the extended Supply Chain, makes it possible both to anticipate these defects and better choose a country so as to reduce to a minimum the problems that may occur”, Jérôme Bour recommends.
- Firstly, political: before choosing a country, it is necessary to assess the risk of turbulence or even conflicts that may affect work or transport.
- Secondly, lead time and quality: the product may not meet the set criteria, resulting in lower quality. Travel may be longer or more difficult than expected, resulting in delayed delivery.
- Lastly, stock: the impact of distance on stock replenishment time may lead one to want to increase production output, which involves a risk of overstocking or on the contrary, shortages, with in both cases adverse financial effects.
Identifying all cost parameters
In addition to the perverse effects of long distance offshoring, there is a risk to underestimate the actual cost of transport.
That is why to avoid unpleasant surprises and rely on accurate estimates, it is important to list all Supply Chain cost items: of course there is the logistical cost itself (transport and warehousing) but also customs clearance, financial expenses (floating stock value…),
administrative expenses (letters of credit…), exchange, quality control (certification, documentation,…), or insurance. Let us not forget, of course, the ever-increasing cost of oil and its direct impact on travel costs.
Analyzing the alternatives
“To make the right decision about offshoring and choose a sourcing country, the best thing to do is to simulate costs and compare situations” Jérôme Bour advises.
To do so there are different tools that not only give you accurate insight into the total cost delivered but also total control over Supply Chain management with estimated profitability gains going from 5 to 10% thanks to savings on the direct purchase and logistics budget.
“To control all these factors and make the right decision concerning the sourcing or manufacturing countries, the key to success is active collaboration between the people in charge of purchases or production and those in charge of the supply chain. In this context,
logistics has become an element of strategic decision” Jérôme Bour concludes.