More and more companies are considering international product sourcing. But before jumping to, "What should we source from China?" or, "How do we find a lower cost source for these commodities?" many are framing the more strategic question, "Should we be sourcing from overseas in the first place?"
The latter is always a great place to start setting realistic expectations and requirements, particularly given both the increasing number of sourcing opportunities available and their attendant risks.
A good second question might be, "What are the net benefits, and how might such an approach fit, or conflict with, our current business model?" Don’t go much further if you don’t have a sourcing roadmap or are not committed to developing one to guide your strategic and tactical activities.
Several companies we know are regrouping after unsatisfactory China sourcing experiences that had little or no strategic foundation. Most often, they had unrealistic timeframes or were not grounded in the overseas relationships that are absolutely critical to success.
The standard rule of thumb for sourcing parts, components or sub-assemblies from a venue like China has been manufacturing that involves low technology and high labor costs.
For many companies’ product and component needs, that still holds true and accurately represents the advantages of a place like China. Gross savings of 55% to 70% are possible.
Let’s consider some key decision points that will lower the savings potential, in terms of both hard and soft costs:
— Build a continuum of your parts/products/assemblies:
1. High volume, low-cost, low-tech commodities
2. Commodity-based, with minimal customization
3. Less commodity, lower volume, higher customization
4. Crown jewels: higher tech, lower volume, higher margins
— Determine what, and how much of the first group (e.g., mostly commodities) feeds into the continuum, and at what chokepoints. In other words, if glitches in a Chinese sourcing scheme upset the supply of key commodities that are used across the continuum, there will be a production logjam.
— Identify/quantify the major costs associated with sourcing from China and deduct from gross savings potential. Those include the costs for running a parallel supply program, transportation, duties and inspections, logistics and other factors.
— Establish a contingency plan. That includes setting and managing an upper threshold of the parts and components being sourced from any single foreign supplier (or foreign market), as well as alternate suppliers to use as a backup or to use as leverage in negotiations. Identify the costs of such a contingency plan.
— Estimate your net savings potential. Is it significant? Is it sustainable? Is it competitive? Can a revision to your current manufacturing processes or your current suppliers make a comparable dent to your domestic costs?
There are other factors when considering sourcing from venues like China. Many companies are asking their U.S. suppliers to follow them as they expand into Asia, particularly when the customer companies are trying to maintain integrity in their supply chain (e.g., qualified suppliers, just-in-time delivery, etc.).
Developing a China sourcing or contract/joint production program for delivery into China (or the region) has kept U.S. suppliers close to their globetrotting customers. Delivering JIT to U.S. customers, though involving an Asian sourcing program, often can involve higher inventory costs, although there are increasing numbers of low-volume/fast-turnaround sources popping up in China.
The evolution of smarter, more strategic approaches to China sourcing and sales distribution into the mainland market is taking hold, and many companies are benefiting. The realities of mid- and long-term opportunity, coupled with clearer costs and commitments required, are becoming more evident.
Patrick Cronin, a partner at Global Business Strategies LLC, Milwaukee, will speak at the Conference on Global Sourcing on Thursday, March 11, at the Italian Community Center. The conference is presented by Small Business Times, the Wisconsin World Trade Center and Whyte Hirschboeck Dudek For further information, call 414-274-3840.
March 5, 2004 Small Business Times, Milwaukee
