Does ISM Give Bad Sourcing Advice?

A couple of years ago, ISM published an article in its Inside Supply Management publication entitled "Doing Business With Canada" (membership required) that was intended to influence US-based purchasers to outsource more business to suppliers in Canada instead of suppliers in Asia.

Reviewing this article today scares me that purchasers may have taken this advice. It's not that Canada doesn't have a good supply base - they do - but the cost advantages of a US buyer buying from Canada have decreased, not increased, over the past couple of years.

Canada may have seemed like a low-cost alternative for US-based buyers at the time largely because of the exchange rate, which the author cites as being 0.85 US dollars per 1 Canadian dollar.

But exchange rates change. And the author even cited the appreciation of the Canadian dollar but didn't let that become a deterrent to providing a glowing picture of Canada as a hotbed for outsourcing.

It is important to have a longer-term outlook when selecting a country from which to source. Consider this:

• The average hourly wage rate for a structural steel worker in Toronto, Canada was 37.36 Canadian dollars per hour in 2003 (source: International Cost Engineering Council)
• The average hourly wage rate for a structural steel worker in the United States of America was 40.32 US dollars per hour in 2003 (source: International Cost Engineering Council)
• In December 2003, the exchange rate for Canadian dollars to US dollars was 1.30. (source: oanda.com)
• In December 2007, the exchange rate for Canadian dollars to US dollars was 1.00 (source: oanda.com)
• Therefore, in 2003, a buyer in the US could buy structural steel labor services in Canada for 28.74 US dollars per hour (37.36 / 1.30 = 28.74) in contrast to buying structural steel labor services in the US for 40.32 per hour – a 29% "savings."
• But, if wage rates stayed relatively the same or appreciated in both countries at approximately the same pace, the difference in 2007 would be much smaller: 37.36 vs. 40.32 – only 7%.

But not even those statistics tell the whole story.

According to the Organisation for Economic Co-ordination and Development, on average, Canadian workers' productivity is only 80% of that of US workers.

So a job that would take a Canadian worker 10 hours and take a US worker 8 hours in 2007 would make keeping the work in the USA the lower-cost decision for the US buyer, without even mentioning the cost advantages of offshoring to Asia.

Again, this is not a knock against Canada. Canada has great companies and brilliant people.

But, from a US perspective, with a weakening dollar, you really need to look at where things are going economically if you need to achieve long term cost savings through a sourcing strategy.

To Your Career,
Charles Dominick, SPSM
President and Chief Procurement Officer
Next Level Purchasing, Inc.
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