Total Supply Chain Impact is the True Basis For Outsourcing Decisions

Decisions about outsourcing are rarely stand-alone. They have a significant impact on the complete operations of a business. Once the strategic intent to explore outsourcing is established, it is essential to understand the full financial and operational consequences of the outsourcing decisions. This document identifies common practices that lead to poor outsourcing decisions. Using current standard costs of products or activities to make business decisions
Standard costs are based on fixed cost allocations determined by current operations. Outsourcing typically alters these operations significantly enough to make current standard costs invalid, even for the products that are retained in-house. Also, standard costs often do not account for costs such as outbound logistics and warehousing. Outsourcing can significantly impact these costs, both for the outsourced products and the ones that remain in-house.

Taking a silo view of outsourcing

Outsourcing creates opportunities for restructuring the broader operations of a business. For instance, it can create excess capacity in one facility that can be used to consolidate different operations or products from other locations. Unless such cascading opportunities are understood, the value derived from the outsourcing actions is only a subset of the overall potential. This may result in businesses erroneously seeing insufficient potential in outsourcing

Limiting the outsourcing options evaluated

Outsourcing can be viewed at a product level or at the level of individual operations. Any given business has a range of options typically available to them each with different levels of implementation challenges and with a range of costCOGS Impact from Outsourcing Manufacturing benefits. Outsourcing is a strategic decision that Activity requires a sound analytical underpinning for the Plant: C (U.S based) COGS: $33.2m Volume : 57m units 0% different options of the end-state as well as the 0 2 4 6 8 10 12 14 16 intermediate steps. -5% A

. The accompanying graph shows the decrease in Cost of Goods Sold (COGS) at various levels of change. A & B represent some operations being outsourced, C & D represent combination of operations and some products being outsourced and E represents facility shutdown. Limiting the options prior to such analysis can result in shortsighted decisions.

Decrease in COGS (%)

18

B
-10% -15% -20% -25% -30% -35%

C D

Restructuring ($m)

Lack of clarity on the complete P&L costs and customer metrics

Outsourcing impacts the total supply chain, especially elements such as tariffs, freight, logistics, inventory, besides any of the manufacturing and raw material related costs. It is essential to reliably account for all these in order to ensure the overall business case.

Inability to predict the cost structure of the suppliers

Ability to predict the pricing offered by the suppliers at the individual cost component level is critical. This capability allows an understanding of the sustainability of the pricing offered by the suppliers in the long-term and how it should change as volume and mix change. It offers greater control on the outsourcing relationship.

SCA Technologies, LLC