144 / 252
132
CHAPTER 6
TOTAL COST OF OWNERSHIP (TCO)
6.2.3 THE HIDDEN COSTS
The obvious costs of purchasing internationally, which can alter any savings
realised from the practice, are only part of the cost equation. Most sourcing
experts acknowledge that sourcing offshore contains a variety of hidden costs
that can undermine the effectiveness of any global strategy. So, what are the
hidden costs of global sourcing [4]? These are illustrated in Table 6.1.
Table 6.1:
Hidden costs of global sourcing.
Hidden cost
Reason
Internal expenses
Higher skills, communication, and time required
to evaluate and work with foreign suppliers.
Supplier health
Gaining visibility into the financial stability of
foreign suppliers can be difficult.
Post-contract lull
Failing to monitor supplier and contract
performance after signing an agreement can
result in ‘cost creep’ or even performance failure.
Duty and tariff changes Employing resources to determine correct duties
and monitor changes adds to total cost.
Contract non-compliance Internal non-compliance with a foreign contract
reduces the total anticipated savings.
True inventory costs
Longer pipelines increase inventory carrying
charges.
Logistics volatility
Managing the rapid changes in shipping costs
adds an element of complexity.
Technology
Extended supply chains require greater tracking
capabilities.
Quality breakdowns
Managing quality problems offshore can be
more costly and complex to resolve, including
the impact on corporate brand equity.
Traditional cost models reveal that net cost savings from international buying
average around 25%. The Procurement Strategy Council has extended this
model by factoring in the impact of hidden costs not considered in the traditional
model. Under this revised model the savings realised from foreign sourcing are
only 4 to 6%. If the Procurement Council’s model is correct, it shows why total
cost calculations must become an integral part of every international sourcing
analysis.
6.2.4 THE REASONS WHY TOTAL COST MODELS ARE USUALLY WRONG
A popular misconception is that information from total cost models is better
than having no total cost models at all. The reality is that total cost models,
like forecasting models, almost always have some degree of unreliability. The
question is, ‘How much unreliability is embedded in the model?’