Sourcing Optimization

We also help make the sourcing and inventory connection with sourcing optimizations that take into consideration the full set of parameters and buying terms that impact the financial, service, operations, and inventory performance of the buy. An example RightBuys™ sourcing optimization is presented

The example is from a recent supply chain strategy project in which the client was considering moving a large portion of their supply base to China and eastern Europe. In fact, the far-sourcing train had a lot of momentum when we were asked to help them consider the full supply chain ramifications of the decision.

As we typically do, we put each of their SKUs through our RightBuys™ Sourcing Optimization System. The optimization revealed that about 1/3 of the SKUs needed to remain domestically sourced, about 1/3 should be sourced in China, and the remaining 1/3 in eastern Europe.

Initial Unit Cost ( First Cost)

Our analysis considers the three main cost elements of sourcing decisions. The first is the initial unit cost (sometimes referred to as the first cost) offered from each supplier. Those costs ranged from $4,101 per unit from the eastern European candidate to $6,906 per unit from the incumbent domestic supplier.


Landing Costs

The second group of costs are landing costs. Landing costs include inbound freight, customs brokerage, freight forwarding, export compliance, sourcing organization fees, duties, banking fees, and the cost of poor quality. In this case the unit landing costs ranged from $146 with the incumbent domestic supplier to $998 per unit from the Chinese supplier. The sum of unit landing cost and initial unit cost is the unit landed cost. Unit landed cost ranged from $4,628 to $6,914.


Inventory Carrying Costs

The third set of costs is inventory carrying costs. Some sourcing analyses consider landing cost implications, but few incorporate inventory carrying cost. We include the three buckets of inventory described earlier – safety stock, lot size, and pipeline inventory. As expected, inventory carrying costs from the international suppliers are much higher. The inventory carrying costs for each option range from $11,005 from a candidate domestic supplier to $20,246 from the Romanian supplier.


Total Acquisition Cost

The sum of inventory carrying and landing cost is the total cost of acquisition. The total cost of acquisition ranges from $1,408,646 to $2,085,405. The unit cost of acquisition ranges from $4,695 from the Romanian supplier to $6,951 from the domestic incumbent.


It is rare for one sourcing option to dominate the evaluation criteria, but that was the case here. The eastern European option provided the lowest total acquisition cost, the highest project margin, the highest return on sales, the highest inventory value added, and the shortest payback.



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