Posted by Paula Hynes | 06 / 04 / 15 0 Comments

There are many factors that impact the total cost of goods purchased.  On the surface, some offshore suppliers may seem cheaper.  However, the true delivered cost is impacted by many variables.  Using this overview, you should be able to better compare all of your supplier choices.

Shipping - This cost must be calculated accurately to determine the true “Cost of Ownership”.

Many companies fail to understand the full cost of shipping from China and other low wage countries.  Depending on the contract, importers may be responsible for picking the goods up at the factory door.  Many foreign manufacturers will include FOB (Free on board) shipping.

Factors to consider include:

FOB – This is the price paid by the manufacturer to get the goods to port.  Depending on the contract this may be an inland port.  Once on the carrier, the purchasing company pays for the remainder of the shipping costs to the final destination (s) as well as import duties and taxes.  All of these charges need to be considered to assess total shipping costs.  Having a FOB contract and terms will guarantee all parties know the extent of their financial responsibilities.
Time to market – There is also a cost to any delays that occur in receiving goods for sale.  When commitments and time lines are not met, profit is lost.  Once a delay occurs, to get merchandise to market in time, some manufacturers have used air freight to expedite the shipping.  Air freight can be 10x more expensive than shipping by container which can erode margins quickly.

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 Labor - Hourly pay rates are only one part of the labor equation

Off-shore labor – For years, China and other countries have been able to capture manufacturing contracts based on hourly rates alone. At first these costs may appear to be cheaper.  However,  many companies also invest time and money to make sure these low cost suppliers meet their quality requirements and specifications.  Today, the increase in foreign wages has changed the equation.  When you factor in all other costs, China is no longer the low cost provider it once was.
Empowered workers - New emerging middle class workers in many offshore companies have become empowered.  There is a great deal of turnover as workers look for higher pay.  In some instances, they may hold management hostage (literally and figuratively) and demand better wages.  In 2011, the Chinese turnover rate was 26.3%, compared to a U.S. rate of 17.9%.  Higher turnover increases training costs and decreases factory efficiency.
Productivity and unit labor costs – As productivity grows faster than wages, the cost to manufacture one unit of a product decreases.  This was the case in the Unites States where unit costs dropped by almost 17% between 2000 and 2012.  Conversely, in China they doubled.

IP Loss
(Intellectual Property Loss) -

Companies large and small have found it very difficult to protect their proprietary design in some foreign countries.   Chinese OEMs have become notorious for these infractions.  If your product has unique advantages over the competition you may want to consider keeping your OEM close to home or even manufacturing in-house.  Unless you are a large corporation that can afford to take the risk, there is little recourse in many countries to stop IP fraud from occurring. This is a sad reality with no easy fix.

Quality -

To be sure they receive the quality required, companies need to work very closely with their OEMs. Many buyers have had to settle for less than perfect output rather than go through the process of returning or scraping inferior products.  The best scenario is to have on-site quality inspectors; however this may not always be an option.  Working through quality issues can be impaired by distance as well as language.   It may take additional time to build check points and approval points throughout the manufacturing process, but the extra time can mean the difference between a good product and a poor one.

Determine true costs -

To determine if off-shoring your supply chain is truly the right move you can use the Total Cost of Ownership Estimator™ created by the Reshoring Initiative.  This calculator outlines 36 variables that will impact the final cost to the purchasing company.

Strong supplier relationships are the foundation of any successful business.  Before you buy, consider all of the contract manufacturing options you have available and weigh the true cost of each one.  Vendor selection, done right, can help your business thrive.  To get more information about these hidden risks, please download our new whitepaper "Hidden Risks in Your Offshore Supply Chain."

Are you aware of the hidden risks associated with your offshore supply chain?  Download our new PDF guide

Topics: Manufacturing, American vs. Overseas Manufacturing, Reshoring


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