A methodology for modelling comprehensive international procurement costs

Abstract

As the economy becomes more globalised and competitive, firms are manufacturing goods in a wider variety of locations. This may be to reduce costs by moving to a low cost country or to place production closer to potential customers. What is often lacking in these facility location decisions is a holistic assessment of the costs associated with production location decisions. Too often the assessment is focused only on a limited set of cost factors (e.g. direct manufacturing and shipping) and does not take into account the dynamic nature of some costs. To address these limitations a comprehensive cost model to assess the cost of procuring goods from alternative locations is presented. A methodology is detailed for monetising many costs associated with international procurement. An illustrative case study analysing the procurement of goods from two locations in Mexico and one in the US is detailed. Results of the case show that the non-direct manufacturing costs associated with procurement (e.g. inventory holding costs and shipping) can be greater than direct manufacturing costs. The effects of fuel and labour cost sensitivity on the alternative locations are also detailed.