• The True Cost of an Overseas Supplier

    The next section of the US Commerce Department's “Assess Costs Everywhere” website ( discusses the travel costs associated with having an overseas supply partner. These are certainly costs that many people overlook, but they can add up fast.

    According the the website, “The average American business traveler spent $4,563 per trip abroad in 2012, of which $2,458 was spent on airfare. Business travelers went abroad an average of 4.7 times in 2012, and the average length of each trip was 16.9 days.”

    The number of trips abroad required by any specific relationship will ebb and flow over time. Initially there is likely to be very intense and frequent trips as the relationship gets off the ground or the new facility gets up and running. After the first year or two the frequency and duration may taper off, but any new product launch or new equipment expansion will likely result in renewed travel frequency for a time. Many of these trips are unplanned or planned at the last minute, or require arrival and/or departure on a specific day in order to deal with a situation which drives up the travel costs significantly.

    Not surprisingly, the countries currently most likely to be chosen for manufacturing outsourcing have the highest average airfares from the United States. In 2013, an economy class ticket to China, Japan, or anywhere in Europe was between $1,000 and $1,400. Contrast this with the average air fare for flights within the Untied States of $382 in 2013.

    One of the more challenging costs associated with Travel is the “... opportunity cost that arise from having personnel or executives out of the office for extended periods of time.” Given that the average traveler makes 4.7 trips a year and that the average trip is 16.9 days long, “American business people traveling abroad may be spending more than two months each year working overseas.” That's two months away from your own facility and two months away from your customers.

    It's certainly possible to have a long-distance relationship with a supplier, and these days Skype calls and video conferencing can certainly provide better communication channels than 10 years ago. There are often indirect costs associated with this communication as well. Generally these communications have to be during off-hours because of time zone differences which can increase stress and reduce the energy and focus on innovation.

    For anyone who has traveled abroad, the final point the ACE tool makes is the cost of figuring out and working with different cultures and people who speak different languages. The most successful international supply relationships are dependent on employees on both sides being able to speak the other company's language. The investment required to hire, retain, and train someone domestically who is capable of speaking the language of the supplying company, and hopefully understanding their cultural norms, should not be ignored. Having someone on your payroll doing the interpreting is critical if any amount of trust is to be built between the companies.

    In conclusion, the costs of travel (direct flight and hotel costs and the costs of being away from the office) and communication costs can be significant. These should be fully allocated to the costs of the products supplied by overseas companies when making the decision to source locally or extend the supply chain in hopes of realizing savings.

    Posted Friday, May 1, 2015 by: Charlie Braun
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