GMAA: A DSS Based on the Decision Analysis Methodology - Application Survey and Further Developments - Efficient Decision Support Systems: Practice and Challenges from Current to Future - page 273

3.3 Selection of segment to be sourced from low cost countries for a global industrial
equipment manufacturer
Another complex decision-making problem in which the GMAA system was to select
segments to be sourced from low cost countries for a global industrial equipment
manufacturer (Jiménez et al., 2005).
Competitive pressures are forcing companies to reduce their overall costs, while delivering
faster and more diverse product portfolios to be more responsive to customers and
competitors. In response to these pressures, companies are increasingly taking advantage of
the opportunity to source from low cost countries (LCC) to achieve significant savings and
give their organizations a competitive advantage. For a global industrial equipment
manufacturer with material costs accounting for about 50% of the value of its final products,
sourcing performance is crucial to original equipment manufactured (OEM)
competitiveness.
Even though multinational companies have been sourcing from LCC for many years,
purchasing in these regions is often very risky, and many companies spend a lot of time and
energy trying to identify and minimize these risks (identifying reliable sources, political
instability, currency risks, longer lead-times, more complex logistics, different/non-existent
legal structures…).
Typically, incremental cost reductions of 15%-20% can be achieved by sourcing from LCC.
Before moving the supply source for some specific segment categories to these regions,
however, the segments have to be proven to have a comprehensive risk assessment,
balanced against potential for lower costs. Although benefits are compelling, they come
with significant challenges.
For the purpose of determining segment categories with the highest profit potential for
sourcing from LCC, a range of conflicting criteria were taken into account simultaneously.
Therefore, the promise of significant cost reductions was not the only consideration, and the
country, industry and supplier risks were key factors considered during the prioritization of
the category segments. In this case, the responsible organization of procurement evolved
into a formal decision process, and other strategic issues related to LCC sourcing activities
were quantified and formally incorporated into the analysis. This way, cost-cutting potential
was only one of the purchaser's objectives.
As shown in Fig. 9, the Overall Objective (O.Objtv) was split into two main sub-objectives:
Potential Benefits (Pot. Benefit) and Risks (Risk). Potential Benefits were measured in terms of
four sub-objectives. The Total annual expenditure (Spend HCC) on all parts in the segment not
sourced from LCC. The expenditure is an indicator of the potential volume with which we
are dealing. The higher the expenditure is, the more room there is for savings. The Price per
kg (Price Kg.) indicates the price regarding the value-added for the parts produced in high
cost countries (HCC). A higher HCC price/kg value-added represents a high potential
benefit. The Factor cost content (F C Content) is subject to comparison between HCC and
LCC. Labor is the main factor cost to be taken into account. The higher the labor content is,
the larger the cost difference window between sourcing countries is. High labor content
represents potential high cost savings when sourcing from LCC. Finally, Supplier switching
costs (Sup. S Costs) is the cost of switching from the current supplier set-up to a new
supplier. The higher the switching cost, the lower the potential benefit. Tooling cost is the
most important and most easily quantifiable switching cost to be accounted for. Other
switching costs can be considered if known.