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.


The Chinese are a proud and hard working people. They believe that saying we can't do it would be admitting failure, and that is not an option for them. Instead, you will hear we'll try, which really means they aren't quite sure they can do what you asked. Always drill deeper to find out what is causing them to be uncomfortable or where the miscommunication might lay.

Another example is the difference in the terms like samples prototypes and FAI parts that may or may not be understood. These are very important distinctions. Also, drawings don't always translate easily, so be clear and explicit in every detail. And don't assume that because you haven't received a question on what you've sent over that all is well. You'll need to ask for on a daily basis confirmation of details, regular status updates and feedback on what you've sent.

Final Cost Saving Thoughts

Bottom line: Find someone who's done it before. Pick a partner or vendor to work with that has already successfully tackled manufacturing in China. The cost savings are there, but this is no time to let your ego drive, or you may never see the payback from your time investment.

There are many successful U.S.-owned businesses operating in China with global reach in all types of commodities and custom manufactured parts. These companies are already battle tested and will help you keep your focus on your key customers and markets undistracted by mastering the intricacies of international logistics. All you have to do is ask around to find the market leaders in your industry/product space it's a small world after all.

Sidebar: A Real-world Cost Savings Example

Let's work out the savings on a Chinese manufactured part, assuming the same $12 part would have cost you $17 in the United States.

The paper savings at the start are $5 a part, or 400 percent. If you buy $240,000 worth of these parts annually (20,000 parts), you can save $96,000 at a gross level on the parts if all goes according to plan. For the $12 part, the total incremental transportation cost is $1.10 on the ocean, or about $22,000 depending on the final destination (not including premium shipping). If you have to ship the production quantity order on an airplane, all bets are off. The annual net savings in this case would be $74,000.

You'll surely get a pat on the back from your boss for improving your margins, but what about the four to eight weeks of inventory now in your pipeline and the carrying cost related to it? With $20,000 to $40,000 in extra inventory on the books to protect your company's supply chain, you'll pay on average $100 to $125 an order (in, out and storage fees). Assuming you keep four weeks on hand and pay to hub the inventory, your additional logistics costs will be about $7,000. Now your net savings would be $67,000 or 28 percent. This is still a very nice contribution to the bottom line, but it's clear how important it will be to make sure all of the product ships via the ocean the forecasting and hub inventory management will need to be 100 percent accurate to ensure the savings.

About the Author: George Dannecker is CEO and president at Vette Corp. www.vettecorp.com.

For another in-depth view on transferring your business operations to China, read Entering China: No One Said It Was Easy .

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