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To Offshore or Not: Try a Price Elasticity Analysis

A decision to offshore will generate more shipments of export cargo and import cargo in international trade.
Archives, Commentary, Global Trade Daily, Imports/Exports, International Trade

To Offshore or Not: Try a Price Elasticity Analysis

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For very high volume products like toys, it’s usually quite apparent after a quick analysis that offshoring is a good choice. At the other end of the spectrum, production of low volume capital equipment like semiconductor test equipment can often be kept locally.

The vast majority of product designs fall somewhere in between, where the volume is perhaps low but growing and the complexity is more than a Christmas tree light, but less than an enterprise-class server. Determining when it makes sense to offshore the in-between products is often a complex decision.

Price Elasticity of Demand (PED) can provide an analytical framework that can bring clarity to some of the issues. Price elasticity refers to the concept that demand for some goods and services is especially sensitive to pricing, but for other goods and services that is not the case. An example of a product category with a high elasticity of demand is soft drinks: with even a small increase in price, demand goes down substantially. However, pediatrician visits are very inelastic; parents will still pay for these services even if the prices go up a fair amount.

Getting a good estimate of what the PED of your particular product is, and then figuring out a few different scenarios based on price and estimated demand is extremely useful in deciding when and if offshoring makes sense. There are plenty of products where a five- to 10-percent or even higher price won’t make any noticeable difference on demand, and conversely there are many products where a few percentage points increase in price will hand market share to the competition. Keep in mind though, that few markets are static and PED can change over a period of quarters as first mover advantage evaporates or a new feature is added to your product or your competition’s or new trade incentives start.

PED can provide a systematic way to come up with some estimates and then the savings, if any, can then be compared against the cost of the additional travel and support of a production process thousands of miles away. PED driven analysis is a great tool to have in your toolbox. It’s one of those tools that can bring sales, marketing, engineering, supply chain, and operations together with numbers, estimates, and a clear thought process to make a data-driven decision.

Charles Cox is managing director, Riverwood Solutions China. He has over 18 years of leadership experience in R&D engineering, manufacturing, and operations. Based in China, where he lives with his family, Cox works directly with suppliers and customers on a daily basis.

Multiple facto must be considered when planning a supply chain to handle shipments of export cargo and import cargo in international trade.
3pls, Archives, Commentary, Global Logistics, Global Trade Daily, Ocean Carriers

Consider Your Customer When Selecting Your Supplier

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Establishing the delivery point is a great starting point for good supply chain design.  Don’t forget that your current consumer and your future consumer may be different.

We have seen instances where supply chains have been developed for the domestic market supported by launch marketing, only to find that demand has been strong in another region and that the supply chain does not easily support fulfilment in multiple regions or even the other region.

Think big, but take a pragmatic approach.  Your supply chain needs to work now, rather than depend on aggressive sales and demand predictions.  Most people tend to fail to plan for huge success, whereas they often have fall-back plans in place.

There are different factors that have an impact beyond where the end user of the product is located.  Will you be fulfilling directly from the vendor to the customer, or will you be staging, customizing or finishing the good locally?  Some products may require localization due to regulations, like NAFTA.  Mass customization is a growing consumer demand and this might require the design to be built upon a single platform with a limited number of configurations and with final configure to order taking place near the end customer.

What is the form factor of the product and what are the complexities of its transportation?  If a product is large and costly to transport, manufacturing it too far away from the end user can negate any savings from lower cost manufacturing geographies.

The cost of inventory in transit will also have to be considered.  Six weeks worth of stock at sea can be costly, particularly if the product is fast moving and versions change in that time.

Dynamic, agile supply chains need to be short.  And don’t forget your inland logistics either.

Don’t underestimate the cost of upgrades or reverse logistics or even recalls, should they be required.  This is particularly likely in the early stages of a start up or a product that is using bleeding edge technology.  The financial and brand image cost of a recall can be damaging to a business, but if the supply chain doesn’t have the agility to deal with this, it can be disastrous or even terminal.

Supply chain design is complicated, but good design will make a huge difference to your ability to service your market both successfully and profitably.  Defining both ends of the supply chain accurately, the customer and the lead vendor, is a great start.

Charles Cox is managing director, Riverwood Solutions China. He has over 18 years of leadership experience in R&D engineering, manufacturing, and operations. Based in China, where he lives with his family, Cox works directly with suppliers and customers on a daily basis.