Right-Shoring for the Global Market
Over the past year, I have learned just how small our world can be. With my employer acquiring another large company, our global footprint for metalcasting facilities and factories utilizing castings grew exponentially overnight. The ABB Motors and Generators business unit now has production facilities in five of the seven continents, with metalcasters and machine shops across those continents supporting operations.
As casting buyers, we must always provide a competitive advantage to our companies by managing the complexity of the changing global supply chain and finding ways to procure our raw and machined castings at the lowest possible total cost of ownership (TCO).
Many of our companies have manufacturing facilities located all over the world, in mature and emerging markets. These facilities have been located in these markets for specific reasons, mostly to supply products to other areas of the world and/or support growth in that market. These dynamics have changed the way we do business and forced casting professionals to develop global supply chains. A major part of our strategic decisions is “right-shoring.”
I have read several articles on right-shoring, and they all lean toward moving purchases from emerging markets back to the U.S. or other mature markets. But right-shoring is not the opposite of offshoring. Right-shoring does not mean we should always purchase our raw and machined castings from within the U.S. Now that many of us have factories around the globe, a domestic metalcasting facility could be located in Dalian, China, or an imported casting could be produced in Indiana and sent to Europe because of the current value of the dollar against the Euro.
Right-shoring means we must evaluate the casting needs of each of our production units and determine where to procure the parts to obtain the best TCO for our company. To accomplish this, casting buyers must capture total landed cost transparency by analyzing several factors within their supply chain when determining where to procure castings. Key considerations include:
- Where the casting will be machined or utilized. Changes in crude prices over the past few years have impacted transportation costs. When reviewing your quotations, remember that the further your suppliers are from your facility, the more freight cost is going to impact TCO. In addition to including the freight cost at the time of the quote, you should develop an average based on the trends over the past year and the predicted future.
- Casting price. It is important to include surcharges in your cost comparisons. Make sure you understand the surcharges employed by each metalcaster. Not all casting suppliers have surcharges for the same raw materials (i.e. scrap, energy, sand, etc.). Review the potential source’s surcharge history over the past year or two, and know the current baselines for each surcharged item.
- Historical trends in labor and material costs in your sourcing markets. Labor costs vary all over the world and are volatile in some markets. Potential changes in price due to labor unrest must be taken into account where volatility exists. Material costs vary across the world and in some cases across countries. In each of your markets, you should understand how labor and material costs have changed over the past several years and projections for the future.
- Lead times and on-time delivery. Metalcasting lead times vary greatly. When evaluating lead times, you must not only consider the supplier’s lead time but also the total travel time to your facility. To ensure on-time delivery, review the past performance for the suppliers you are currently using and ask new metalcasters for their performance records for the past year. Low performance rates will affect your inventory levels and ability to service your customers.
- Inventory cost. The inventory you are required to carry is proportional to the “total” lead time. You should also include any warehousing cost when figuring TCO.
- Managing variability within your customer base. If your customer demands are spiky and you have long lead times, you will need to carry more inventory to cover these spikes.
- Cost of quality. If you are sourcing from an emerging market and will utilize pre-shipment quality inspections or a third party inspection service, you must include these costs in your evaluations.
- Time required to support customer needs if there is a quality issue. If you have quality problems once your facility has received your castings, longer lead time suppliers make your reaction time slower, and you could incur additional freight charges.
- Logistics cost. You must include any third-party logistics providers, freight, customs fees, duties and port costs associated with offshore purchases.
- Startup cost. Any casting supplier will require startup costs; however, dealing with foreign sources can present additional challenges due to differing international specifications, interpretation of drawings, language barriers, etc.
~Douglas Bushey, ABB Motors and Generators, Greenville, South Carolina
Douglas Bushey is the global casting and fabrication category manager for the Motors and Generators business unit of ABB, Greenville, S.C.