November 2024 Volume 6

OPERATIONS & MANAGEMENT

Chinese Price and TCO, % of U.S.

Chart Title

12.0%

Price

10.0%

8.0%

TCO w/15% Tariff

TCO

6.0%

46%

4.0%

2.0%

32%

Source: TCO user database

8%

0.0%

1

0% 25% 50% 75% 100% 125% 150% 175%

Figure 2

risks. These factors range from the obvious, such as duty and freight, to more subtle, such as inventory carrying cost and the benefit of having engineering and manufacturing talking in the same language in the same time zone. Fig 2, based on 190 cases comparing Chinese and U.S. sources on a broad range of products, shows the impact of using TCO. The percentage of U.S. “wins” goes from 8% based on price to 32% based on TCO to 46% if a 15% Section 301 tariff is present. Actually, most of the tariffs are 25%. See Figure 2. Impact of TCO Line Chart Many buyers are measured and rewarded based on price paid, on purchase price variance (PPV). Several supplier salesmen have told me that the OEM’s buyer said the supplier needed to match the Chinese price. The salesman pointed out the quality and delivery issues the OEM was having due to the imported components. The buyer responded that those costs were not in his/her budget. If you run into such silos, appeal to the general manager or to departments, e.g. Quality, Manufacturing and Sales that are bearing the down stream costs generated by the imported products. We are working on a revised TCO Estimator that will quantify geopolitical risk, environmental, social and governance (ESG) and Section 301 tariffs. The percentage of U.S. wins with TCO will rise substantially. Reason Orders Won vs. Imports As expected, “price” is not on the list. Here are the factors mentioned: • Delivery (32%). This makes good sense. Most forgings are

delivered by surface freight since their price to weight ratio is too low to justify air freight. Delivery time from Asia can be 3 or 4 weeks. Obviously, much longer during dock strikes or other disruptions. Your freight time to your typical customer is probably a few hours up to a few days. Protect that advan tage. I have surveyed other industries in which orders were lost to imports due to delivery. Your target should be to have the product leave your factory in less time from inquiry or order than your import competitor. If you are not achieving that advan tage today, consider automation or organizational methods such as Goldratt’s Theory of Constraints or Rajan Suri’s Quick Response Manufacturing (QRM). I have seen repeated cases of QRM cutting delivery times by 50% or more. Shorter delivery allows your customer to enable JIT inventory while reducing the risk of stocking out. Smart customers will pay for faster delivery. • Quality (27%). I believe quality issues are less frequent from domestic sources and certainly less impactful. When there is a quality issue, a local supplier can understand the issue faster and provide replacements more rapidly. I know of one case where a company had an Indian supplier. When a container arrived with poor quality components, the company had to guess whether the components still in transit had quality issues or not. It was difficult to decide whether to wait for the next shipment or fly to India immediately, assure the problem was fixed and air freight good components. As quality rises around the world, we cannot be complacent, however.

FIA MAGAZINE | NOVEMBER 2024 38