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About the Author

David Alexander
Executive Vice President
Direct Source China

David Alexander is Executive Vice President of Direct Source China, a U.S. owned sourcing, manufacturing and project management firm based in Shanghai. Since 2005 Mr. Alexander has worked with U.S. manufacturers and distributors with China sourcing and manufacturing initiatives developing and implementing cost savings strategies and programs with low cost country manufacturing partners.

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Supply Chain Comment

By David Alexander, Executive Vice President, Direct Source China

March 8, 2012

Unlocking the Secrets and Myths--When to Use an Offshore Supplier

The Top Five Cost Levers to Consider When Manufacturing Offshore in China

There is one reason and one reason only that decision makers elect to have products manufactured in China and that is cost savings.  Assuming that manufactured costs are lower in China due to labor savings, there are many other cost levers to consider when manufacturing offshore in China. Here are the top five:

Alexander Says:

Too often small but critical details can be lost in translation as operators working with offshore suppliers try to work through cultural barriers, time zones and misunderstandings.
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1. Freight costs—Freight and logistics should not exceed 10-12% of your total cost of goods. In other words, if you ship a 40 foot container to the U.S. this will cost on average $5,000 including import fees, duties, tax and drayage (overland transportation to/from a shipping port). So if you can’t move approximately $50,000 of product, that should already be 20-30% below existing manufactured cost, you need to re-evaluate whether it makes sense.

2. Carrying cost of capital—Cash is king in any business. It is critical to produce inventory that will move once it gets to the U.S. otherwise each month that inventory is tying up capital and not producing top line sales revenue, you are eating into your cashflow.

3. Warehouse space—every square foot of a warehouse used to store products has a fixed cost.  Unless you have excess space available, you need to be certain you are allotting this valuable real-estate to products that are generating revenue.  Otherwise the savings will be offset by the additional cost of warehouse space.

4. For items #2 and #3 it is imperative that analysis be given to not only finished goods but also raw material and components.  Often overlooked is the advantage of using China to absorb the financial burden of not only managing but paying for commodity purchases, raw material, components and works in progress.  Every month of financial responsibility taken on by your China producer is a month of cashflow freed up for your business.

5. Start-up costs—your China factory will absorb many intangibles associated with start-up costs including learning curve, purchasing coordination, and in many cases tooling not to mention infrastructure such as plant, property and equipment.

Quality, consistency and timing should only be the “cost of admission” and no sacrifices should be made in these areas. Not all products make sense for offshoring. Proper due diligence should be given in all of these categories before launching any outsourcing initiative.

One of the greatest disadvantages of using Chinese based manufacturing firms is the lack of having a U.S. contact that is knowledgeable about and engaged in your business. Things can and do go wrong and peace of mind that goes with having a contact in the U.S. is invaluable. This goes a long way, particularly in the start-up phase of a project as hands on involvement is required with any new product. It is important to have day to day contacts in your time zone for trouble shooting, planning and preparation. Too often small but critical details can be lost in translation as operators working with offshore suppliers try to work through cultural barriers, time zones and misunderstandings.

Even those dealing with satellite factories in the U.S. have to deal with production issues, timing and other miscues. Anyone who ever played the secret game as a kid, where one person begins a story, then passes it around a ring of people until the last one hears it, has seen how details are lost and the story is altered from its original concept. The same is true when passing along instructions to offshore manufacturing partners. Unless you have a consistent source, who speaks your language and understands the objectives, you can end up with a mess.

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