Make, Buy Domestically, or Buy Offshore
Arbor Outdoor Products makes aluminum tent poles in-house: 320,000 units a year on a line running at 74% utilization. Unit cost is $4.12 - materials $2.05, direct labor $0.95, allocated overhead $1.12 - on equipment with a $1.8M replacement value that is 11 years old. A Chinese supplier quotes $3.60 FOB, 45-day ocean transit, 10,000-unit minimum, 5% price review at 12 months. A domestic supplier quotes $3.95, 3-week lead time, 2,000-unit minimum. Offshoring frees 11,000 sq ft and 14 employees; severance is $210,000. In-house first-pass yield is 96.5%; the offshore sample yield is 94%, and incoming inspection would add 1.8% to landed cost. Demand is stable within plus or minus 6%.
1. Build the total-cost comparison and recommend an option.
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The $4.12 in-house cost is not the right comparison, because most of the $1.12 overhead is allocated and stays whether or not the line runs. Only avoidable cost counts: roughly $2.05 materials + $0.95 labor + the variable portion of overhead, plus the future avoidance of the $1.8M equipment replacement if the line is retired rather than replaced.
Offshore, fully loaded: $3.60 + ocean freight, insurance, duty and any applicable trade measures + 1.8% inspection + quality cost of the 94% yield gap + carrying cost on 45 days of pipeline inventory + obsolescence risk on 10,000-unit minimums + a 5% escalation in year two + severance of $210,000 amortized over 320,000 units, which alone is $0.66 per unit in year one. Add those and the quote is unlikely to beat domestic.
Domestic: $3.95 plus short inbound freight and three weeks of pipeline - likely near $4.05 landed, with a 2,000-unit minimum and no severance.
Recommendation: domestic supplier, or retain the line if the avoidable in-house cost computes below $4.05. Offshore only makes sense if volume grows enough to spread severance and minimums, or the price gap widens materially. Check whether the 11,000 sq ft has a real alternative use - if not, its 'release' is worth nothing in the model.
2. What non-cost factors belong in this decision, and what would make you reverse it?
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Non-cost factors: 45-day transit against demand variability of only ±6% is tolerable, but it removes the ability to respond to a design change or a promotion. Two suppliers versus one internal line changes the risk profile. The offshore option introduces currency, trade-policy, and single-supplier concentration exposure; the domestic supplier introduces dependence on a competitor's capacity. Losing the internal capability is partly irreversible - restarting fabrication after two years means re-hiring skills and re-buying tooling. There is also a customer-perception dimension if the brand sells on domestic sourcing.
Reversal triggers, written into the contract and reviewed annually:
- Annual volume above the level at which offshore severance and minimums are fully absorbed.
- Offshore landed cost falling more than a set percentage below domestic.
- Domestic price increases above the renegotiation clause, or a quality yield below an agreed floor.
- Ocean freight rates or transit reliability moving outside a defined band.
- Utilization on the remaining in-house line dropping below the point where overhead is no longer absorbed.
Stating the triggers now is what converts a one-time analysis into a managed decision - otherwise the choice is re-litigated from scratch every time a purchasing manager changes.