DON’T LET YOUR
OFFSHORING
BECOME A
SHIPWRECK
Ian Bradley
MBA, CMA, CFM, CPA(NC)

DENMARK
• Home of the origanal Vikings.
– Hint not Minnesota
• Home to Hans Christian Anderson
– Author of the “Little Mermaid”
• Currency is the Krone

PART 1 – Is off shoring cost PART 2 – What are the risks
effective? & how do we mitigate them

PART 1
IS OFF SHORING COST
EFFECTIVE?

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

WHAT IS
OFF SHORING?
• Locating operations overseas
– Foreign supplier
– Foreign subsidiary
• Outsourcing services overseas

WHERE DO
YOU WANT TO
GO?

OFFSHORING
STRATEGY
Set up
manufacturing Sell to the
Set up a local market
distribution
center
Direct from
vendor
Import
using
agent

BELGIUM
• Scene of Napoleon's last defeat -
Waterloo
• 800 kinds of beer made
• Home to Godiva chocolate

WHAT TO
OFFSHORE?
Manufacturing Service Overhead

WHY?
MANUFACTURING SERVICES OVERHEAD
Cost Reduction Cost Reduction IT
Materials Labor force HR
Processes Customer
New Markets Service
Accounting

WHY?
MANUFACTURING SERVICES OVERHEAD
Cost Reduction Cost Reduction IT
Materials Labor force HR
Processes Customer
New Markets Service
Accounting

CULTURE
• Attitude to workforce reductions
• Ethical stance

SPAIN
• The catholic church has been in
construction since 1882
• Home to possibly the greatest ever club
soccer team
• Home to the 1992 Olympics

PRODUCT
COSTING

RELEVANT COST
- LOOK AT THE BIG PICTURE
Relevant Cost
• Material
• Labor
• Indirect materials
Remaining
• Variable overhead
• Stepped fixed cost
True
savings

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

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

INVENTORY INVESTMENT
BEFORE AFTER
Overseas •2 Weeks
•5 days Subsidiary
Manufacturing
Ocean
•5 Weeks
•2 days
Finished Goods
US •2 Weeks
Inventory

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

CONTINUALLY
REVIEW
REAL OPTIONS
• Assumptions change
• Outsourcing costs change
• New options appear
• Risks increase

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.”

ENGLAND
• Home of time
• Winners of the 1966 World Cup
• Home to 2012 Olympics
• Greatest country in the world
• But the weather sucks

PART 2
WHAT ARE THE RISKS &
HOW DO WE MANAGE
THEM?

LEARNING • What is Risk Management
OBJECTIVES • Risk Appetite
PART 2 • What are the risks?
– Political Risk
– Business interruption
– Supplier
– Exchange Risk
• Managing Risk

ERM
COSO
FRAMEWORK Monitoring
Activity 2
Activity 1
Information & Communication
Unit B
Control Activities
Unit A
Risk Assessment
Control Environment

RISK
APPETITE
• Culture
• Strategic Objectives
• Financing
• Industry

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?

SHANGHAI
CHINA

POLITICAL

POLITICAL RISK
MANAGEMENT
• Avoid the country
• Require a higher return
• Diversify
• Keep capital low
• Continually monitor situation

BUSINESS
INTERRUPTION
• Political – Strikes
• Accidental
– Fire / flood
• Natural disaster
– Tsunami
– Tornado
– Hurricane
– Earthquake

MANAGING BUSINESS
INTERRUPTION RISK
• Insurance
• Diversify purchasing
• Higher safety stocks
• Retain internal capabilities

SUPPLIER RISK
• Poor quality
• Inferior material
• Late delivery
• Inability to return product
• Rework
• Damage to brand

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

EXCHANGE
RISK
• Transaction Exposure
• Translation Exposure

MANAGING EXCHANGE
RISK
• No management
• Buy in own currency
• Natural Hedge
• Forward Contracts
• Futures Contracts
• Options
• Swaps

GERMANY

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