By Russ Sandlin
Champlain College - English CEGEP
900 Riverside Drive
Saint-Lambert, Quebec J4P 3P2
Over the past decade, the trend for Canadian companies have been to outsource manufacturing overseas.Some countries offer you low cost labour force along with reduced manufacturing operating costs. On the surface outsourcing to other countries may seem like a good business decision, but is it?
Have you conducted a true cost analysis taking into consideration the transportation costs by sea or air and know that these modes are usually used in intermodel or multimodel? What about the fuel surcharges and insurances? You need to take into account customs brokerage fees as well. Also, depending on the product you are manufacturing, what are the additional duties and tariffs? Lets look at an example.Lets say you are looking to import a finished product and you have properly identified its product classification. You have three supply choices available to you. Country A offers this product for $4.00/unit. Country B offers the same product for $5.00/unit. Your third choice would be to source the product locally in Canada for $6.50/unit. On the surface, with this information, Country A would be your natural choice. However based on the product classification and the country of origin, you will probably have to apply a duty fee on the initial costs.If there is a free trade agreement with Canada on this product with your country of origin, then no additional tariffs will apply. However Canada may have a preferential tariff arrangement for that item which will add to the cost per unit. The country of origin may not have preferential tariff agreements but rather most favoured nation tariffs which augment the cost per unit even higher. If the country of origin is subject to the general tariff, then the unit cost will be increased by 35%.Take this new cost and add the GST at 5% and then the PST at 9.5% on that total. You will notice that the cost per unit starts to look much different.Now take into consideration the transportation costs, your customs Brokerage Fees and shipping insurance. Also take into consideration the political and economic stability of the country of origin. This may also affect your insurance costs as well.At the end of the day, what you originally thought was the most attractive country to source your product may turn out to be the most expensive and the local alternative may prove to be your most economically viable choice.The big question for you is when everything is taken into consideration, where is your best price/unit? The results will differ depending on the product classification and the country of origin. Who can help you conduct an accurate assessment?Help is available to you from Champlain College - St. Lambert's Transportation and Logistics department.We can come to your office and deliver a workshop to you and your team, instructing you on what to do and where to go for accurate information so you can accurately assess your specific situation.Offshore outsourcing is a major business decision. As demonstrated in our example, the perceived savings of outsourcing may not be as financially beneficial as originally thought. Tariffs, transportation costs, insurance and brokerage fees can quickly augment the cost of production making locally sourced production your best decision. Make sure you are making the right decision for your company's success. If you would like to know more information, call the Continuing Education department at Champlain College - St. Lambert today and speak to a transporation and logistics specialist to arrange your onsite workshop. Learn how to calculate the true costs of outsourcing overseas. Call us at 450-672-6046.