Why is China always the easy answer for sourcing?

July 12, 2006 by SwizStick  
Filed under Education, Supply Chain Management

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Regular readers to this blog know that I have been scratching my head for some time now wondering why companies don’t look at sourcing product closer to home as opposed to China.

World Trade Magazine has an article out that openly questions “Is China Always the Answer?” and the answer is a resounding “no”.

Take a market for a contract electronics manufacturer not unlike Solection where some 80% of its customers reside in the United States. London goes through the sequence of likely events: “Suppliers ship all the components to China. We make it for you. We ship out with a value-added tax. It sits on a boat for six weeks.” Plus, such complications like the possibility of engineering problems or the difficulties of effective communication on a twelve-hour time difference.

“Add it all up,” London says. “Does this make sense?” More and more, he’s not sure. In fact, as was the case with Solectron and an increasing number of U.S. manufacturers, maybe the right answer is, “We should move it all to Guadalajara.”

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It’s a matter of trade-offs. Yes, typical wages in China remain half of those in Mexico, but the cost of Chinese shipment to the United States averages about ten percent of the total value of shipped goods. Trucking from Mexico, by contrast, raises prices only about two to three percent. The difference in how long that transport takes is even more dramatic: six weeks by ship versus twenty-four hours by truck.

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The alternative? Some commodities that are sourced in China, it turns out, can more wisely be procured from nearer low-cost regions, “or even from domestic sources.”

That’s what Tellabs decided. Last year, the communications equipment maker, lured by lower labor costs, was well on its way to shifting considerable manufacturing from Guadalajara to China when it abruptly put on the brakes. Why? Quashing enthusiasm was a three-to-six-week longer lag time between customer orders and the Chinese contract manufacturer’s delivery as well as the discovery that the Chinese would impose a nearly twenty-percent value-added tax on raw materials (avoided only by routing China-made parts to Hong Kong and back before final shipping).

Then there was the issue of communication in a business where engineering specs can change several times a day. Would Telllabs have to rip apart finished assemblies on arrival? And, there’s the need to get product to market fast in the high-tech field before they become obsolete. Chinese manufacturers ship most goods by sea-based containers, a six-week transit to the U.S. Consultants calculated that Tellabs could lose its entire Chinese labor savings if forced to deliver just 10 percent of its volume by air rather than sea.

Dave Cooper, Solectron vice president, supply chain management, coined a phrase for this constellation of negative factors: ‘Priceberg.’ “There are certain things above the water that get a lot of attention, but then there’s a whole bunch of other things below the water that tend to get overlooked.” Factors like lead times, missed sales, service levels, proximity to customers, country risks, currency risks, inventory costs, and quality costs. “Sometimes they can amount to a larger percentage of the total problem than just the price you see above the water. You have to take the total landed cost.”

This is yet another must read article for those currently or considering sourcing from China or moving production there. The article doesn’t say companies should avoid China, simply that careful calculations and analysis should be considered to ensure that the move is the best one. As the title of the article suggests, China is not always the answer. Sometimes it’s cheaper and smarter to simply do it close to home.

Low Cost Country Sourcing: Look beyond China and India

Sourcing or moving manufacturing to China?

Factory to the World

SCD : Renewed interest in Mexico as sourcing location