NTMA PRECISION HIDDEN COSTS: A BASIC LIST An independent study has shown that quoted prices from foreign sources of special tooling and machining often do not reflect the actual costs involved with the purchase. Purchasing management literature cites many factors other than quoted price that affect the total costs of contract purchases-the "hidden costs" that should be considered in choosing suppliers. For example: Geographical Location: Turnaround time, costs of shipping, travel, and communications all increase rapidly when distant suppliers are selected. While this consideration may be relatively unimportant in normal times when production schedules are known and steady, it becomes critical in periods of rapid changes and shifting production priorities. Transportation Alternatives: A plant located near several rail, truck, air and barge routes, even though further away in miles, might be more advantageous than one where access is limited to one or two alternatives. Inventory Costs and Controls: Economic order quantities ("EOQs") depend on inventory costs, the cost of transportation, turnaround times, and the cost of delays. Enough material must be on hand to keep production going, plus a large enough safety or reserve stock to take care of emergencies. Close proximity or quick response time means that inventories can be kept to a minimum. On the other hand, if long lead times require additional inventories be maintained, these additional costs could offset any price break from the distant suppliers. Quality Controls: If a supplier has adequate statistical controls and other quality control procedures, some inspection chores normally done by the customer can be reduced or eliminated, thereby decreasing the buyer's internal costs. Reserve Capacity: Business's ability to meet surges in demand economically often means the difference between profit and loss in a given product line. Relying on a low-bid supplier without sufficient reserve capacity to meet the customer's peak needs risks long-term losses for a nominal short-term gain. Responsiveness: More generally, a manufacturer's flexibility in meeting its own customer's demands depends on whether its suppliers are willing to meet emergency and rush shipments, can adjust to the inevitable changes in specifications after an order is placed, and are willing to stand behind their products and services to deal with problems, accidents and errors. These are critical factors, but especially difficult to measure. Technological Depth: Finally, a purchaser should look to the longer term-how good is a supplier's research and development? What is the supplier doing in areas of interest to the purchaser in the next five to ten years? Stagnant technology may be associated with lower bid prices in the shortterm, but will result in long-term obsolescence and diminished competitiveness. When a company sources abroad, all these hidden costs are still relevant, but new complexities can come into play. For example: Customs Duties: These are fixed and readily calculated, but sometimes are not included in the price quoted by a foreign supplier. Financing Costs and Paperwork: Terms of payment on foreign shipments may require letters of credit, bankers acceptances, or some other international financing mechanism-most of which require a fee to be paid to a guaranteeing bank plus additional paperwork to document the transaction. Foreign Exchange Rate Fluctuations: If a price is specified in foreign currencies, then the U.S. purchaser is bearing the risk of dollar devaluation before delivery and payment. But there is also a risk if the price is quoted in dollars, which is usually the case. A sharp decline in the value of the dollar will reduce the localcurrency profitability of the contract for the foreign supplier. This could affect its quality/responsiveness performance, ultimately raising the risk of a total lack of completion and delivery if the potential loss under the contract becomes too great. Travel Costs: Purchasing agents and engineers will often have to conduct site visits to assess the facilities, personnel and quality control systems of the supplier. These can be considerably more expensive than comparable visits to domestic firms. The greater distance, with the inconvenience and added cost of frequent visits to both sides, will also make it harder to develop close working relationships between customer and supplier personnel. These added travel costs-and other management costs as well often are not evident because they are hidden in administrative accounts outside the purchasing areas. Contracting Terms: European and Asian suppliers sometimes demand annual contracts with specified monthly shipments established, in contrast to the more flexible arrangements that are more customary from U.S. suppliers. Delays: Greater distances, the possibility of disruptions in transportation, and fewer transportation alternatives mean late shipments are more likely, and the length of delays may be longer. Modifications: The turnaround time necessary for required repairs and modifications (if available at all) takes longer due to distance and delays and other difficulties associated with moving goods and services across borders. Communications: Some communications problems are obvious. Foreign sourcing requires, for example, higher cost long-distance phone calls and telexes, as well as any translation costs. Also, the opportunity for direct oral communication may also be limited by the difference in time zones. But some communications problems are less well known-like differences in U.S. and foreign industry practices, standards and use of technical terms. For a more information contact: Ft. Washington, MD 20744 STABILIZATION IS A CONTINUATION OF OUR LEGISLATIVE TESTIMONY ON H.R. 486, THE "DEFENSE PRODUCTION ACT AMENDMENTS OF 1989." WE WILL BE HEARING TESTIMONY TODAY ON BOTH TITLES UNDER CONSIDERATION. THE FIRST IS A SERIES OF AMENDMENTS DESIGNED TO STRENGTHEN TITLE I OF THE DEFENSE PRODUCTION ACT. THESE WERE CONTAINED IN H.R. 4037 LAST YEAR. TITLE II IS ENTIRELY NEW. IT FOCUSES ON ECONOMIC ADJUSTMENT ACTIONS TO ASSIST INDUSTRIES, WORKERS AND COMMUNITIES IN HELPING THEM TO OVERCOME THE ADVERSE EFFECTS OF POSSIBLE WEAPONS SYSTEMS CUTBACKS AND OTHER MILITARY FACILITY CLOSINGS. OUR FOUR EXCELLENT WITNESSES TODAY ARE: Mr. William W. Winpisinger International Association of AFL-CIO Mr. William Bywater President International Union of Electronic, Electrical Mr. William G. Phillips President National Council for Industrial Defense Mr. Scott Wylie Corporate Director of Communications Raychem, Inc. representing Testimony By William W. Winpisinger International President International Association of Machinists and Aerospace Workers Before the U.S. House of Representatives Subcommittee on Economic Stabilization of the Committee On Banking, Finance And Urban Affairs Defense Production Act Amendments 2220 Rayburn House Office Building Washington, DC Thank you, Madam Chair. My name is William W. Winpisinger and I am International President of the International Association of Machinists and Aerospace Workers (IAM). The IAM represents approximately 850,000 members working in some 32 industrial sectors in the United States, Canada, Panama Canal Zone, Puerto Rico, Virgin Islands and Pacific Trust Territories. Over 100,000 members of the IAM are engaged in the production of goods or services for the military. The work IAM members perform ranges from operations and maintenance, production and assembly, and research, development and testing. Our membership includes professional engineering staff, designers and technicians, precision instrument, tool and die, and tool planners, highly skilled and specialized machinists and machine tool builders. Our members must have a high degree of knowledge, education and training in ceramics, electronics, fiber optics, hydraulics, mechanical service and repair, optics, radar and virtually all the sophisticated technologies required in today's industrial world. Lasers, scanners, sensors and computers all are tools of the trade for today's IAM member. When we aren't using them, we are very apt to be installing, fixing or repairing them. The IAM is also a member of the National Council for Industrial Defense and participates in and supports the good work of that organization. We genuinely appreciate the opportunity to sit before this Subcommittee and present our views on H. R. 486, containing amendments to the Defense Production Act of 1950. We are grateful, Madam Chair, that you and the members of your Subcommittee have so diligently and honestly focused attention on the nation's industrial base over these past several years. You are uniquely providing the Congress and the public a view of our industrial complex that is not otherwise readily visible. You, your Subcommittee and your staff are to be commended for the hard work and results you are producing. I last testified before your Subcommittee two years ago, I believe yours was a lonely voice. Today, it appears you are a bow wave of concern developing in the Congress over the sorry plight of this nation's industrial base. When The FSX deal, as I'm sure Brother Bywater will make clear, is just beginning to bring it all to a head. But this legislation and your subcommittee's work goes beyond responding to symptoms. You are treating root causes of the deindustrialization of America. Those root causes of trouble showed up in the civilian industrial base long before they resulted in the foreign dependency that plagues the health and integrity of our military industrial base. |