Time value of money. Since most offshore deals require
the use of a “letter of credit,” the buying firm loses the
use of funds when the letter is established. Suppose the
shipments arrive two weeks after the letter of credit is
established. For a $1.5 million purchase, the buying firm
bears a $60,000 (.02 × 1.5 million × 2 weeks) opportunity
cost expense.
4. Quality issues. The buying firm must spend the
necessary time to correctly specify and articulate quality
expectations. Then evaluation makes sure that the
sample is from a legitimate production run.
Prototypes/lab samples should not be analyzed.
Remember, the buying firm is interested in the
actual production on the entire batch. In some cases,
the buying firm should inspect statistical process
control charts to assess projected defect rates and
the inspection methods. The buyer should renegotiate
the agreement ultimately if the process is out of
control. These quality issues can easily increase costs
of offshore sourcing.