Symphony Consulting Newsletter – Q2 2004
"Outsourcing to China"
The outsourcing of manufacturing to China is one of the most significant industry trends in recent years. Companies of all sizes and product types are developing plans to take advantage of China’s low cost structure in labor, materials, and overhead. Not all companies, however, conduct enough analysis upfront to determine if migration to China is the right thing to do for their business. Furthermore, those companies that decide on a migration path often take the same approach towards outsourcing as they do in the US. The result leads to surprises that show up in their revenues, time-to-market, and COGS.
Transferring manufacturing of your products to China can be an opportunity or a threat depending on how you approach it. Here are a few key issues to consider:
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Assess the suitability of your products for transfer to China: High volume, mature, labor-intensive, and stable products are considered to be the most suitable for manufacturing in China. But Chinese manufacturers have greatly developed their capabilities and can now handle higher mix, more complex products as well. Your choice of manufacturers, however, will be more limited on these higher complexity products, which means you will have to apply even more scrutiny to how you structure your manufacturing relationship in China. In some cases, the hidden costs of outsourcing to China simply do not justify making this transition. For example, a high mix, low volume product that is based on a new technology and is undergoing significant ECO activity may not justify the risks of going offshore. Also, considerations in the area of inventory turns and flexibility can force a company to ship a significant portion of its products via air, which can have a drastic impact on COGS.
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Establish a plan for partner selection and management in China: In the US, the process of evaluating a manufacturing partner often begins with a quote package. This is not the case in China. If you are serious about establishing a long-term relationship, you must invest the time and energy upfront in visiting contending manufacturers and establishing relationships early in the process. It is important that you do this with the active participation of your company’s senior level management. Contracts and agreements are meaningless unless you have the commitment of the right players in the factory where you products are built. This is just as true if your products are built by the Chinese entity of a US EMS provider with whom you have had a long-term business relationship in the US.
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Spend time understanding the issues that can introduce risk: Unless you want to spend time on long, late-night conference calls at quarter-end understanding why your product was held up at a shipping port because of how it was classified on the bill of lading, spend time understanding the critical issues that can impact your success. The legal, business, and transportation infrastructure in the three major manufacturing regions of China are different from one another and this can impact your ability to get product on-time. Also, the dynamics of negotiation with your Chinese business partners are not the same as that of the US. Negotiating for capacity, resolution of quality problems, recovering from warranty failures, and sharing inventory risk are critical issues that you need to sort out before you engage.
The points mentioned above are examples of a few key factors that you need to consider before you decide whether or not migration to China is right for your business and if so, how to go about it with calculated risks. At Symphony, we can help you navigate through the analysis and implementation phases of such a project.
We also offer a one-day workshop titled “Outsourcing Manufacturing to China: How to Assess Total Landed Cost, Minimize Risk and Manage Suppliers.” If you are interested, please visit http://www.symphonyconsult.com/workshops/workshop_china.php or send us an email.
