What additional factors would Soho’s managers have to consider if the DVD-player supplier was based in Mexico? One important factor would be exchange-rate risk. Suppose the Mexican supplier offers to sell Soho 250,000 DVD players for 320,000,000 pesos. Should Soho make or buy? The answer depends on the exchange rate that Soho’s managers expect next year. If they forecast an exchange rate of 20 pesos per $1, Soho’s expected purchase cost equals $16,000,000 greater than the $15,000,000 relevant costs for making the DVD players in Exhibit 12-6, so Soho’s managers would prefer to make DVD players rather than buy them. If, however, Soho’s managers anticipate an exchange rate of 22 pesos per $1, Soho’s expected purchase cost equals which is less than the $15,000,000 relevant costs for making the DVD players, so Soho’s managers would prefer to buy rather than make the DVD players.
Soho’s managers have yet another option. Soho could enter into a forward contract to purchase 320,000,000 pesos. A forward contract allows Soho to contract today to purchase pesos next year at a predetermined, fixed cost, thereby protecting itself against exchange-rate risk. If Soho’s managers choose this route, they would make (buy) DVD players if the cost of the contract is greater (less) than $15,000,000.
International outsourcing requires managers to evaluate manufacturing and transportation costs, exchange-rate risks, and the other strategic and qualitative factors such as quality, reliability, and efficiency of the supply chain. Concepts in Action: “Starbucks Brews Up Domestic Production” describes how Starbucks brought back production to the United States.