MBA presentation.

1. Case 3
Lauren Perry

2. A Different Perspective
This article, regarding offshoring, posits that hidden
costs and changes to expected costs may make it more
advantageous for firms to scale back offshoring
operations and consider near-shoring.

3. Why Offshore?
 Offshoring has become very popular in today’s global
economy, especially in certain sectors
 Most businesspeople are aware of some of the benefits
(lower labor costs, primarily)
 There are also well-known downsides to offshoring
(loss of domestic jobs, quality and standards issues)

4. Accounting Refresher
 When executives decide whether or not to
begin, continue, or scale back offshoring
operations, costs must be considered
 Cost of goods sold
 Costs are allocated differently

5. Landed Costs
 Executives must determine “total landed costs”: the
sum of all costs associated with making and delivering
products to the point where they produce revenue (i.e.
where they are sold).
 Landed costs include raw materials, carrying
inventory, managing product returns, and other
hidden charges*
 These are incorporated into cost of goods sold and
total supply chain costs

6. Hidden Costs
 In addition to the “normal” costs, when offshoring
there are some “hidden” expenses which should be
considered and allocated
 Oil prices (in multiple places in the supply chain)
 Example: it costs $100 to ship a ton of iron from Brazil to
China—more than the cost of the mineral
 Wage inflation and a weak dollar
 Wage differential in Mexico vs. China

7. Total Supply Chain Costs
 Transportation costs, including fuel surcharges
 Product groups—different product groups incur different costs
(customs classifications, volumes, degree of quality controls, size and
weight, perishable
 Customs tariffs, duties, and taxes
 Inventory (long supply chains increase capital requirements)
 Time (cash-to-cash cycles)
 Quality
 Returns and added product work
 Allocate technology costs to product groups (international supply
chains require two times as much information technology as domestic)
 Internal controls
 Selling, general, and administrative expenses (travel time, global
communications, outside experts, and even litigation)

8. Handout: Graphs
 Handout from Case 3
 We will take a look at two graphs which show visually
 Wage inflation
 Cost of manufacturing
 The article acknowledges that curves are shifting due
to economic fluctuations

9. Example
 Total landed cost for midrange server, compared
between Asia and U.S.
 In 2003 would have represented 60% labor savings
 36% of these labor savings were offset by
freight, shipping-related charges, inventory, product
returns
 Indexed to $100, that gave Asia a $64 landed cost
advantage
 After factoring in higher labor and freight costs the
former savings have turned into a $16 burden
 Labor savings now are only $45 due to wage inflation

10. Suggestions
 Article suggests executives think about near-shoring
 Firms must consider long-term geographic
distribution of demand for their products
 Think about the importance of speed, availability of
skilled talent, potential for further productivity gains
in Asia, one-time transition costs, local import and tax
implications, and organizational interfaces

11. Conclusion/Opinion
 Offshoring has obvious benefits and pitfalls
 Hidden costs
 Shift from pure cost savings to value
 Costs and benefits seem to depend on product group
 The author examines a few points that firms may not
have previously given enough weight to. It should be
interesting to see how globalization and evolving
economies impact offshoring in the future.

12. Q&A

13. Discussion Question
What do you think are some additional advantages and
disadvantages of near-shoring?
Do you think there is anything the authors of this article
overlooked or downplayed when making their point?

14. References
 Case 3 “Time to Rethink Offshoring?”
http://www.ingesfor.com/BA537/Cases/Case%203_1/cas
e%203_1.pdf
 10 Tips for Understanding Total Landed and Delivered
Costs
http://www.joc.com/2010/10-tips-understanding-total-
landed-and-delivered-costs

15. Thanks for your attention.