China or Bust: Recognizing the True Costs of Outsourcing

All that glitters may not be gold when it comes to outsourcing manufacturing productions to China. First, weigh the costs and learn the facts with this helpful guide.


In general, manufacturing in China is not a good fit if your products frequently change. Stable products are a much better fit due to language barriers and the fact that rapid change is still somewhat counter-cultural in China. In addition, the distances between China and other ports of call require that your parts be in-transit for four to eight weeks, which also makes product changes extremely expensive, as products may become obsolete while in-transit. All of the dynamic factors listed above should be taken into consideration when you weight transferring your product's manufacturing processes to China.

Don't Spend Your Savings Yet

Even when your products fit well with the Chinese manufacturing model, when you work directly with Chinese manufacturing operations you may face some serious offsets to your cost savings. Working with an experienced manufacturing partner is one way to protect your company from these costs. Otherwise, you will need prepare for them up front and build them into your business plan.

Training costs for skilled labor and management are often a hidden cost. Your turnover rate could be as high as 30 percent or more, which results in obvious costs such as training and less obvious costs like reduced efficiency and quality. Your biggest turnover will occur just after Chinese New Year in February, as many employees will travel home for the holidays and never return, giving no notice.

You will also feel the effect of fewer skilled laborers and experienced managers, as your plant's internal controls will not be to what you are accustomed. You will write off inventory more often than in the United States, and you will experience higher fall out, scrap and re-work costs as well. Your day sales outstanding (DSO) will run 90+ days.

What Is the Price Placed On Getting Parts to Customers On Time?

Expect to incur very expensive airfreight costs if an order scheduled to ship via ocean is late. All it takes is a couple of airfreight shipments because your plant is running behind to wipe out your cost savings or your profit margin, especially when airfreight is 25 times more expensive than ocean freight (approximately $1.51 vs. $.06 per pound for airfreight and ocean freight, respectively). This is less of an issue if you partner, rather than outsource directly, but can still come into play if your forecasts are wrong.

In any case, to protect your supply chain and/or your customer's supply chain, you may need to keep inventory in the United States and Europe (either in your own warehouses or in one kept by a third-party logistics provider). Remember that boats take a long time to get to the United States, especially to the East Coast, and you can expect a minimum of four weeks transit time, which could be up to eight weeks during the busy seasons. What would happen if you miss a due date to a critical customer, or shut down your line when a boat is stuck off the coast of Los Angeles for two weeks, waiting to offload? To offset this situation, plan to increase inventory levels by four to eight weeks and/or incur hub inventory storage fees to preserve the integrity of your supply chain.

Travel Costs

If you choose to outsource your manufacturing, travel, entertainment and communication costs will be five- to ten-fold what they would be in the United States.

People will need to be sent to China once a month and perhaps even more often on bigger projects. Business class travel is the most practical when you're traveling over 20 hours to Hong Kong, but costs can be prohibitive. Even so, if you want to keep your people you'll need to send them business class the regular trips are grueling and they will be missing home the second day they arrive in China.

Don't underestimate the impact of travel and the time differences between U.S. operations and those in China. Your team will need to work late hours and weekends to keep up with the team in China. Additionally, to keep programs in sync, invest in an affordable conference calling service in order to hold conference calls on a daily basis to keep up with current events.

How Well Do You Communicate?

How well do you communicate as a company and as a management team? If you take on the challenge of managing outsourced Chinese manufacturing operations, you may need to completely change your communication processes. The most important lesson for manufacturing in China is that you cannot over communicate.

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