Ingrained in the ongoing debate of imported vs. domestically manufactured products, there lies an often-repeated accounting assumption that most often shifts the advantage to the imported product arena.
In evaluating imported products, the cost that is often compared against a fully loaded manufactured cost is the fully landed and duty-applied cost from an overseas vendor.
The comparison assumes that the manufactured fixed costs do not apply to the imported items, as they are not consuming fixed resources or, as is often the case, there is no precise accounting model available to correctly allocate the incurred yet real handling costs.
In reality, an imported product often consumes every bit as much fixed cost. Consider, for example, an injection molded, retail-bound “widget” that requires a printed outer carton and a master carton.
The design of the part, often the tool, and the specifying of the packaging and artwork are typically generated domestically. That may require input from a variety of fixed resources in product engineering, tool engineering, graphic design, quality assurance, package engineering and marketing.
Consider also that the sales force may have been involved in the early stages of selling the product, as had accounting and management.
Assuming for argument's sake that none of those functions were applicable, we still must consider the impact on fixed-cost functions: quality assurance, shipping and receiving, purchasing/procurement and warehousing. Compound that with the hidden costs associated with multiple trips by various personnel to expensive overseas locations and the costs associated with multiple first-piece-inspection shipments.
Unfortunately and incorrectly, there is a school of thought in the pro-import arena that states that fixed resources already exist regardless of whether we import.
There are multiple pitfalls in that assumption.
If warehouse space is available — and resources to receive, inspect, ship, track and invoice can handle the imported products without any impact to other products or intercompany functions — then that accounting method may well have us believe that there is no fixed cost involved with importing an item.
However, assuming that warehouse space is at or near capacity and all related functions are bordering on overtime situations, which product is to blame for pushing it over the edge, where the decision is to add more space, hire more people or contract labor and warehousing?
In reality it is not the “next” product that takes on the burden, it is the products to which fixed costs are applied. The result: fixed costs of domestically manufactured items increase, and the disparity between the costs of make vs. buy become wider. Eventually only the very high-margin, domestically manufactured items can survive the added costs.
In a marketplace where the mantra is price rollbacks and cost containment, the end result is eroding margins on domestically manufactured items or elimination of the fixed-cost sinkhole — manufacturing.
Albert Einstein was quoted as having said, “Not everything that can be counted counts, and not everything that counts can be counted.” As we have seen in recent times, (ac)counting correctly can make all the difference.
