February 2003 | Case Studies | I.T. Toolkit

Xporta: The Total Cost of Global Sourcing

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Ingersoll-Rand scopes out the full cost of sourcing from different overseas suppliers.

Would you drive to the next county to save $20 on a DVD player? Is the sales tax higher there than at home? How much gas would you burn and how much time would you waste in traffic? If you buy online instead, will shipping costs wipe out your savings?

These questions are not so different from the ones companies ask when sourcing overseas. In the global economy, buying materials and finished goods in countries where prices are low has become standard practice. But how much do you really save when you source from Sri Lanka or Brazil? Is the vendor with the low bid the most economical choice?

Not always, cautions Dave Horne, CEO of Xporta, Santa Clara, Calif., a developer of global trade software. Companies that source domestically can base their choices mainly on material costs and inventory considerations. "But as soon as you go global, logistics, taxes, tariffs, and duties can overpower cost savings," he says.

Many companies have already located the lowest-cost vendors and aggregated purchases to negotiate better pricing. "They realize they can only get so much out of manipulating material costs," Horne says, and must identify other ways to save money.

Last year, manufacturer Ingersoll-Rand (IR) embarked on the traditional route to savings, deciding to purchase more materials from countries it identified as low-cost sources. IR operates numerous businesses with products in four categories: climate control, industrial solutions, infrastructure, and security and safety.

"The objective was to increase the amount that we sourced from these countries from a current five percent of the total to a goal of 30 percent of the total," says Tony Bozzuto, IR's director of global logistics. "The calculated cost savings were $200 million."

But to capture those savings, officials at IR knew they had to examine not just vendors' prices, but all the costs involved. "I suggested that we needed some sort of tool to help us through that process," Bozzuto says.

How Much for Extras?

Executives at IR estimated that transportation, duties, taxes, and other extras added 13 percent to the cost of imported materials. But a study of IR's businesses showed that figure fell on the low side: the average cost of extras ranged from 13 to 24 percent of the basic price of imported materials. Some scenarios were much worse. "We found cases where it was 200 percent," Bozzuto says, when purchases triggered anti-dumping penalties or other special fees.

Officials at IR examined several software solutions that calculate the total landed cost of a purchase. But as they explored, the purchasing and logistics executives decided the figure they really needed to understand was "total acquisition cost," Bozzuto says.

Total landed cost includes money spent on materials, transportation, duties, taxes, handling fees, and similar factors. Total acquisition cost also considers how sourcing decisions affect inventory and cash flow.

In addition, the team wanted to "look at risk factors that come into play when dealing with particular countries or suppliers"—such as political instability or potential labor unrest, he says.

This Instead of That

The team decided to implement Xporta's Global Strategic Sourcing solution. Xporta's web-based system stood out because, rather than simply calculating landed costs, "it served as an optimization tool," Bozzuto says.

Xporta's software looks at a company's current supply lines, at potential new vendors, and at a database of tariffs, taxes, restrictions, and other international trade rules. Analyzing all the possibilities, the optimization program "comes back and says you could spend a lot less money if you did this instead of that," says Horne.

"'This instead of that' can mean just changing the mix of what you buy and where you buy it," Horne explains. It might also mean practicing "duty engineering"—adjusting the manufacturing process to avoid certain fees.

For example, he says, steel shipped to the United States from China is subject to heavy import fees, but an "electronic enclosure"—a piece of steel bent into a case to contain electronic components—enters duty- free. "So if I buy steel in China to create an electronic enclosure, I'll have them bend it over there," Horne says.

Often, decisions that affect the international trade fees an importer pays are made in the engineering, transportation, and procurement departments without any coordination. "This is the first time people have looked across multiple silos to ask, 'How do I optimize that?'" Horne says.

IR started implementing Xporta Global Strategic Sourcing last April, running the system on its own server. Through a link to Xporta, it receives updates to the global trade database any time tariffs or trade rules change. Xporta also offers its solution as a hosted service. Users pay a monthly subscription fee based on the number of people using the system and the number of regions where they trade.

At IR, much of the implementation involved training staff in each business to conduct studies. Within an IR business, people in logistics, sourcing, import/export compliance, or all three might use the system. By the end of last year, IR had nearly finished training users throughout the corporation. If every business had been in a position to take the training right away, "we could have had it done in six weeks," Bozzuto says.

The other major implementation task was to load data about IR's operations—current suppliers, manufacturing plants, and contracted freight rates—into the system.

To illustrate how global strategic sourcing works, Bozzuto describes a hypothetical study on steel castings that IR buys from a foundry in Ohio and ships to a plant in North Carolina. Purchasing staff identify three potential new sources for the parts in China, the Czech Republic, and India. They obtain several quotes from these vendors, based on different Incoterms—contract conditions that define when the purchaser takes possession of the product.

The user loads these quotes into the system and assigns the product a tariff classification code, which determines the fees and trade regulations that apply. The optimizer also considers the cost of shipping the parts from each origin.

In addition, "it considers the transit times we have in the system for the shipments, because that affects how long we own the inventory," Bozzuto says. "The system also looks at the associated duties, taxes, and handling fees. The output of the system is a line-by-line comparison, showing the optimum solution." The user can then export the data to a spreadsheet for further analysis.

Xporta also allows users to perform what-if analyses. "You can change the Incoterms, you can change the frequency of shipments, or you can decide to carry a certain level of safety stock and see how that affects the overall solution," Bozzuto says. A simple study takes 15 minutes or less; a complex one takes a few hours.

No More Assumptions

"We couldn't have done anything like that before," Bozzuto says, without relying on assumptions and estimates. For a more accurate study, "typically we'd go to a freight forwarder to get that information, or get it from a government web site," which provides data only for importing goods to U.S. facilities. "If you import into other countries, it becomes a lot harder" without a solution like Xporta's, he says.

After the system helps IR choose the most cost-effective source for an item, the company revisits that decision "only when necessary," Bozzuto says. Changes in tariffs or taxes and fluctuating currency rates are some factors that might prompt a new study. But users within IR won't have to watch for those changes on their own.

"Once you do a study, it's on the system," Bozzuto explains. "If certain elements change—say, if the duty rate goes up—Xporta flags it." It then sends an alert to the person responsible for that study, who might run a new analysis.

Each sourcing organization within IR uses the tool to compare existing sources with alternatives and to source new materials. In some cases, users have found ways to save as much as 26 percent on the total cost of acquisition, Bozzuto says.

Employees can't claim savings when they use the system to source materials that IR hasn't purchased in the past, he points out. But in every case, he adds, Xporta "allows them to make the best decision the first time."

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