Realities of Outsourcing to China: 5 Expert Guidelines
Posted by Paul Nelson on Wed, Jul 03, 2013
China has the reputation of offering low prices on all forms of manufactured goods, including wire harnesses, electro-mechanical components and sophisticated electronic devices for a wide range of industries. Businesses under pressure to compete on price look to outsource to China almost automatically – especially if competitors are already doing so. And setting up an outsourcing partnership with a Chinese manufacturer can be accomplished almost entirely online these days, right?
On the basis of these widely held but untested beliefs, many small-to-midsized manufacturers are looking to outsource to China before they have done sufficient due diligence to apprecciate all the expenses and likely challenges. "Container loads of mistakes" are all too often the costly result.
In a recent article in Toronto's The Globe and Mail daily newspaper, management consultant and Asian outsourcing expert Chris Griffiths cautions SMB manufacturers that "the lure of low prices can quickly be offset by the investment and risk." Mr. Griffiths suggests a careful, step-by-step path towards evaluating true costs and risks of outsourcing overseas. Here are five guidelines he strongly recommends:
- Exhaust all options to source as close to home as possible before even thinking of outsourcing overseas.
Based on Mr. Griffiths' direct experience, "prices in China aren't as low as they sometimes appear by the time you add up duties, freight, customs and brokerage fees, quality-control expenses, business trips, banking fees and currency exchange fees." Many SMBs will also need to pay for and warehouse extra inventory due to the longer lead times associated with overseas outsourcing. The true costs of offshore outsourcing – which are rising all the time -- are a big reason why more and more US and Canadian SMB manufacturers are "reshoring."
- Take your time choosing a China-based outsourcing partner.
While Internet resources offer a starting point for a vendor search, use them for general information only. It can be difficult to sort out actual manufacturers from brokers or trading companies acting as middlemen. Likewise, some of the best factories won't use those forms of advertising, relying instead on their solid reputations. A sourcing agent can be helpful but adds to costs.
- Ask sharp questions of a few "short list" prospects.
Once you have a "short list" of potential offshoring partners, narrow it down further by getting firm information on minimum order quantities, lead times and payment terms (payment in advance is common). Ask for references first and foremost. From the best prospects on your list, request work examples and be prepared to pay for them.
- Never do business "sight unseen" in China.
Mr. Griffiths recommends from personal experience that on-site visits to potential outsourcing partners' facilities are a must. Get a business visa and plan to visit as many factories as possible. Schedule your trip around a China-based industry trade show if you can - this will help expand your vendor contract. But again, "don't assume the company that owns the booth owns the factory." Make sure you're entirely clear on who's who.
- Do what it takes to ensure quality.
With quality and reliability being so vital in contract manufacturing scenarios, you need to take extra steps to ensure success prior to shipping. Plan for further trips to China to review quality yourself, or hire a third-party quality control service. Also be sure you have the chance to approve samples that accurately represent the build quality you demand in every shipment. You're looking to save money by outsourcing to China in the first place, and "you typically get what you pay for," cautions Mr. Griffiths.
With wage increases, rising freight costs and other factors rapidly closing the gap on costs between overseas outsourcers and North American contract manufacturers, the realities of global markets are changing. If you are considering outsourcing, now is a good time to take a hard look at the highly competitive "onshoring" options right in your own back yard.
If your business is currently contemplating outsourcing overseas, what are your primary drivers for doing so? And what are your concerns about making offshoring work?
Flickr Photo Credit: by Stichting Onderzoek Multinationale Ondernemingen