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