Question: “In your and other discussions of outsourcing to China and other foreign countries I keep reading and hearing about a variety of other, somewhat hidden costs. What are these, besides the more obvious ones of freight and customs? Why do we need to pay so much attention to them?”
Answer: “Mostly they are indirect costs, what we call the cost of coordination and communication. Since they are indirect, they are often more hidden, poorly measured, and with consequences that are not necessarily immediate and obvious. One company we know of, doing over $100 million in outsourced products to China has over 100 US-based people traveling to/from China, to meet with vendors, resolve problems with quality, deliveries, materials, processes and other issues. The travel expenses alone are huge, of course. And these are relatively simple products, yet substantial in-person communication is required.
Our favorite story of this kind of communication / coordination problem is old and involves a company with an “internal outsource” arrangement, where engineering design was in California, with production in Arizona, about a $ billion/yr operation. The complexity of communication between engineering and production was so difficult that a company study showed that about 5% of the entire manpower of the whole company was involved in this single communication activity, with scheduled company flights several times a day to/from the two locations. It’s seldom as easy as it looks, and when one adds differences in language, technical understanding, culture and other variables, it can easily escalate into a huge problem, a costly one – yet the unit cost and logistics costs can be as originally planned.”
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