Question

Companies have to thing long term instead of short term in order to offset all the extra costs involving outsourcing.

Some of the costs we will discuss are:

Cost of selecting the vendor

Cost of Transition

Cost of Managing an Offshore contract

Please comment on each.

Answer 1

Both buyers and suppliers need a significant commitment to creating a genuinely beneficial relationship. Buyers often need to bring a lot of effort into the procurement process. For example, both the supplier's technical department and the buyer's product designers must be incorporated into the decision-making process in order to gain the benefits of supplier design feedback. The partnership can be costly and time consuming. Furthermore, due to unnecessary switching costs companies may become captive to their strategic supply partners. It's very difficult to quantify the costs and benefits of supplier assessment. Many are of a qualitative nature, such as improved customer loyalty, increased productivity, less warranty problems and enhanced responsiveness. Those can be quantified by few firms. However, researchers have been studying the impact of supplier assessment on buyer-supplier relationships on a broader scale, which in turn affects financial results. The data suggests that the assessment of the suppliers essentially has a positive impact on the financial performance of a company.

Transition Costs means the one-time, initial set-up, costs and expenditures incurred by the Parent Company to begin the process of obtaining the Separation of certain Services as specified in (and subject to) the terms and conditions of the Agreement and the costs of obtaining those Services and expenses incurred by the receiving party prior to the date of the delivery of the Services in preparation.

The problem of developing offshore manufacturing contracts that result in an optimum transfer price has been worrying multinationals over the past few years. A business in a developed world markets one single product on its market in such contract designs. The same commodity is produced at the same time by another corporation in a developing world with lower production costs. The seller places an order, on the basis of which the producer produces the ordered quantity, after anticipating the market demand, and offers a transfer price which in turn maximizes its net profit after paying green tax to its government. The producer calculates the production costs, the export duty owed to its government and the cost of exporting the commodity to the developing world while determining the sale price. The seller then sets the retail price, after buying the commodity from the supplier at the transfer price, which maximizes its net profit after charging its government the import duty; the retail price, however, the average selling price available to the industry must be no more than that. Offshore manufacturing contract thus yields optimum after-tax profits for both businesses.