There’s no question that changing tariff policies are adding complexity to supply chain leaders’ strategic sourcing decisions. While tariffs may be the primary source of uncertainty in the industry today—uncertainty is a constant in the supply chain. Whether it’s port disruption, natural disasters or capacity constraints, the supply chain is always susceptible to uncertainty. 

In an industry with significant demand variability, the cost of maintaining a consistent and reliable source of supply is high. In speaking with dozens of leading manufacturers, distributors and retailers, enVista’s supply chain strategy experts have found that while sourcing decision makers are largely aware of the obvious costs behind global sourcing, there are many hidden costs in maintaining consistent sourcing that are less apparent.  

To ensure you’re selecting the right sourcing location, it is important to fully model these hidden costs in your supply chain to understand what impact they will have on your business.  

In this blog, we will unveil the hidden costs of consistent supply chain sourcing and how to analyze those costs in your network to inform your decision-making.

The Hidden Costs of Changing Supply Chain Sourcing

Some sourcing costs are obvious, such as the cost of goods and the logistics costs of transporting them.  

Aside from these more obvious sourcing costs, there are four common sources of spending that sourcing decision-makers overlook: 

• Overstock 
• Inventory capital 
• Warehouse space  
• Lost sales

The hidden cost of overstock 

When purchasing supplies, especially from more distant countries with longer lead times, safety stock is crucial to avoid running out of stock. The longer the lead time, the more safety stock is required to protect against swings in supply.  

The challenge here is that some companies may order too much safety stock and then be unable to sell it. Holding inventory that you can’t sell is a significant source of cost that is often overlooked.
 

The hidden cost of inventory capital 

Inventory is one of the supply chain’s largest capital investments. Having 60 days of extra inventory sitting in your supply chain to accommodate a 60-day lead time can be a significant drain on your company’s capital.  

It’s common for our consultants to see organizations with two to four times more weeks on-hand from imported goods than domestic goods, creating hidden costs they weren’t aware of. Every day that inventory sits in your network, it is amassing more capital and becoming more of a burden on your bottom line. Not considering the capital cost of holding safety stock can contribute to significant overspending in sourcing.
 

The hidden cost of warehouse space  

When planning for safety stock, the cost of storing the inventory is often left unconsidered. It’s not just about finding any distribution center (DC) space in your network to hold your safety stock but finding the right space for it. If you have too much safety stock taking up space in your DC and not enough space for necessary inventory, this can cause cash flow issues down the line.  

Many supply chain leaders are already struggling with warehouse capacity constraints. A warehouse is considered ‘full’ at 85 percent capacity, so even if there appears to be space to hold safety stock, operational challenges may occur if you exceed that 85%. This is an important factor when considering your sourcing locations.  

The hidden cost of lost sales 

While overstock is a significant source of hidden costs, understock is just as impactful. If imported supply is delayed for too long and your safety stock isn’t sufficient enough to meet customer demand, you can risk running out of stock, resulting in lost sales.  

When evaluating domestic versus international sourcing, consider that it is much easier to expedite a domestic order. With domestic orders, smaller shipments can be shipped on a truck overnight. International air freight for small shipments is very costly, and it is not as feasible to speed up shipping vessels. 

How to Select the Right Sourcing Location

Consider lead times and variances

While lead times themselves can create challenges, lead time variance is the silent killer. When determining your sourcing location, consider not only the typical lead time, but the likelihood for variance in that lead time depending on certain circumstances.  

Along with lead time variability, calculate inventory performance on some of your key products to avoid overstocking or understocking your network when ordering your inventory. This will help you avoid some of the hidden costs that can impact your bottom line in uncertain times. 

Cost modeling and what-if analysis

Cost modeling and what-if analysis are crucial for making data-driven sourcing decisions. Each sourcing decision has its own set of costs vs. benefits. Supply chain forecasting and planning tools, sometimes enabled by AI, can run what-if analysis on your sourcing decisions to determine which one is most cost effective for your business.  

Cost of the region vs. Logistics costs 

If you have the option of insourcing or outsourcing for certain products, your ultimate choice will come down to whether you want to pay more for the goods or more for transportation.  

By sourcing from overseas, you can pay less for the cost of goods but more for the logistics costs to transport them. By sourcing domestically, you may pay more for the goods but less for transport costs, such as international shipping costs and tariffs.  

Both of these options have their own pros and cons, and this is where complex modeling and what-if analysis will be important. If you don’t have the space in your network to hold high amounts of safety stock, you may want to source closer to home to avoid long lead times. 

Contingency plan

What’s most important is to make sure your supply chain can continue operating at peak efficiency regardless of the circumstances. Any hit to customer service levels is a hit to your business. This will require contingency plans that account for uncertainty.  

How enVista Can Help

Supply chain sourcing decisions can come at a high cost, and maintaining consistent, reliable sourcing even during uncertainty will increase that price. The question to ask yourself is, how much is continuity in your customer promise worth to you? The good news is that there are optimal sourcing strategies for every business, regardless of size.  

enVista’s supply chain experts have worked with hundreds of retailers, manufacturers and distributors to help them select the best suppliers for their network needs. We understand the market, and even more than that, we understand how to create a plan that will ensure operational excellence regardless of uncertainty. 

Powered by Optilogic’s supply chain design platform, we help clients visualize trade-offs and hidden costs to make confident, data-driven decisions.  

Get expert answers to your sourcing challenges with enVista. Let’s Have a Conversation.™