Tuesday, August 19, 2008

The Best Cost Might Be Right Next Door

China Success Stories just published this piece by Terri Morgan of Wudang Research Association -- http://www.chinasuccessstories.com/2008/08/14/china-sourcing-quantity-price/

I certainly agree with the point of the story -- when the total costs are considered, China may not be your best option. In fact, you may find the best price locally.

In my business, I consider myself something of a teacher whenever a new client calls. (I need to think of a way to get paid for this! Oh well, when the time is right, they will call me again) I certainly don't want to make promises I can't deliver on, or find myself losing money on parts I source!

I once worked with a company that had moved some brass machined components to China. The volumes were VERY high, so it seemed a good idea; however, there were some fairly complex features that resulted in high scrap rates, even at good Chinese machine shops. It turns out that their US operation had developed some very specialized machine tools over the course of 30+ years, and these machines had evolved to the point that very little operator interation was required. The short story -- moved the production back to the US. (The other option would have been to move the machine tools to China. Of course, that could mean that suddenly your competitors now have access to the same source of product as you!)

I believe in doing the work up front, to improve the odds of a successful sourcing project later. Part of that work must involve a business case. Is the project justified? Take a look at the total cost of the product from China, including shipping, insurance, and verification by a third party. Consider the non-recurring costs associated with the project such as tooling, engineering support, factory audits, etc. Is the NPV still positive? Sourcing projects involve risk. When the opportunity is right, the returns can be impressive, but all too often, companies run headlong to China hoping for huge savings, only to be disappointed and frustrated. Do your work up front, and look at sourcing projects as you would any other investment in your business.

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