Note from the editor:
What started out as a simple look at how product lines in the aftermarket have evolved over the years, ultimately became a five-month long examination of overseas sourcing and all its associated opportunities and challenges. This month, Dave Caracci ends his series with some hard questions that distributors need to ask themselves if they think they want to get into the direct-sourcing game. Some distributors are already doing it, while others are seriously considering it. In any case, the opportunities are real, as are the liabilities and challenges.
With all we’ve heard in the news this past year, everyone has become extremely aware of the concerns about low-quality products being sourced offshore. From lead in paint on toys, to the failures of low-quality tires, the news continues to point out that when buyers demand the lowest-cost product, we may end up receiving products inferior in quality. Some questions to consider:
• When a lower quality product becomes a safety issue, who is liable and who covers the cost incurred by correcting the problem?
For many products, like tail lights or tires, NHTSA becomes involved in the oversight of recalls, issuing of fines, etc. Many distributors, retailers or importing manufacturers believe that the offshore manufacturer will be held liable for such costs. This is not necessarily the case, since generally the offshore manufacturer cannot be held liable in the US and NHTSA considers the importer as the equivalent of a domestic manufacturer. In a recent case of custom tail lamps that did not meet the required safety standards, NHTSA fined the importing reseller for each recall with total fines reaching $650,000.
US aftermarket distributors, retailers and jobbers have relied upon their supplying manufacturers for the monitoring of quality and the assumption of liability when an unfortunate quality issue arises. Considering what has already happened in cases mentioned above, before offshoring of products can be done in a responsible manner, issues such as the following must be considered or the purchaser could be putting his or her company at risk:
• Does your firm, as the purchasing importer, have enough information about the specifics of the product being ordered to ensure that the product you are ordering and will receive is what the consumer, technician and government agencies require?
• Is the amount being saved by direct sourcing product from an offshore supplier enough to cover possible claims and fines if a quality issue surfaces? What is the cost per piece for this and are you including it as part of the real cost of the product?
• As the importer/reseller, do you have systems in place to track all the individual consumers or technicians who purchase your product, in order to support a product recall at the consumer level should a government agency require it? As indicated in the example above, have you included the per piece cost of such a system into the cost of the product?
• How will you be sure that the manufacturing source you choose will supply the quality needed? How do you even identify all of the critical requirements of the product you are ordering?
Considering the above questions, I am inserting the following from a recent aftermarketNews interview with Federated’s Larry Pavey. His experience in these issues is extensive and although the focus of his answer is China, his advice very appropriate no matter what country is being sourced.
“…China, like the United States, has some very good plants and some that are not so good. I believe we will continue to see China emphasize manufacturing of automotive components because there is a large export market and a growing domestic market.
“Recently we have seen a lot of companies outsourcing production of their products without proper quality control, including tires, dog food and toys. In each case, a reasonable amount of independent or internal quality auditing would have found the problem and allowed it to be rectified. A plant or process can produce poor quality no matter where it is located. Processes must be in place to ensure quality in raw materials, component suppliers, production activities and final assembly. This involves managing many different types of processes and having proper checkpoints every step of the way.
“In our country, customers have come to rely on their suppliers to make sure that quality controls are in place. They are protected by liability insurance, the reputations of the brands and suppliers and the judicial system. However, products produced by companies outside the US may not have the same environmental controls, are not insurable and are largely isolated from our judicial system.
“…When a company imports and deals directly with an offshore manufacturer, it must understand that it will be held completely responsible if something goes wrong, as the companies recently making headlines have learned.”
When purchasing from a US-based supplier, aftermarket purchasers have become accustomed to paying only for what they receive. This is most often not the case when purchasing product offshore. In most instances, the importer takes ownership of the product as soon as it leaves the manufacturer’s dock. This brings into play issues not normally considered as part of the cost of the per piece purchase price of the product. A few such issues could be:
• Lost in Transit — Reportedly, 10,000 containers per year are lost at sea and who knows how many others are stolen. When purchasing from a US supplier that has imported the product, the supplier covers that cost and is included in the per-piece price quoted you. But when you are the importer, the risk is all yours.
If the container with the product you purchased from offshore disappears in transit, do you have a reserve or other consideration included in your per piece cost?
• Increased Inventory Carrying Cost — For decades, distributors and retailers have been trying to reduce inventory costs through the demand for just in time (JIT) availability. In fact, it was not too long ago that a WD would change lines to a supplier that delivered an order in days as opposed to weeks! And, mailing an order instead of using the Internet is out of the question — that would add several days to the lead-time, resulting in increased inventory levels at the distributor to cover the lead-time! With order lead-times from offshore in the form of months (as many as four to six months for some products) the required inventory levels at the distributor/retailer must be increased by many months as well.
When you decide to direct source and import some of your product line to save money, have you included the additional inventory carrying cost in the per piece price of the imported unit? Don’t forget to add even more inventory to cover any product that disappears in transit.
• Obsolescence Cost — One very negative result of parts proliferation is that distributors, jobbers, retailers and others have found more and more parts each year in the inventory that doesn’t sell fast enough to support the inventory level. When inventories are increased to cover offshore lead times and the potential of lost-in-transit parts, it’s a fact that when a part slows in sales causing an overstock position, the quantity on hand to be returned will be far greater for a product having a three-month lead time as opposed to a one-week lead time.
What do you do? Simple: Return it to the supplier.
But hold on a minute, you can’t just ship it back overseas. There are duties, import/export regulations, freight and frankly, most offshore manufacturers won’t take it back anyway.
Ask yourself: When you decide to direct source offshore, to save on cost, have you included the product you may have to liquidate since returns are not possible or financially impractical? This should be calculated and added to the cost analysis to see what the real per piece cost will be.
Whether we call it direct sourcing, offshoring, importing or simply bypassing a step in the distribution chain, there may certainly be an opportunity to lower acquisition cost. But there may also be many dangerous pitfalls that can increase the real acquisition cost and perhaps even place very high financial liabilities on the importing firm. To be certain, the ‘deal’ is better offshore, but all of the issues and liabilities must be considered, estimated and included as part of the real cost of the product.
In the end, there may be no single right or wrong answer. However, the phrase “buyer beware” has never seemed more appropriate.