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14 Nov 2012
Clearing Up the China Go No-Go Decision
by David Alexander, President, Direct Source China
When we fail to plan our plans fail. Smart business leaders and product developers often sit in limbo for weeks or months when considering how to go about contract manufacturing products. While in this election cycle China has been maligned as a source of lost jobs in the U.S. there are now more reports than ever about the massive growth of exports to China
by those states who have correctly identified this new market for goods and services. Likewise, China continues to present the best option for manufacturing goods requiring a high degree of labor. Following is a checklist for understanding which products make sense for outsourcing manufacturing in China.
The greatest reason product manufacturing is offshored is potential for labor savings. Assuming the cost of materials is consistent worldwide, including packaging, if the manual labor component of total cost of goods is 25% or higher this is the first and most important consideration. Parts that are produced through automation such as injection molded or extruded products do not have much of a manual labor requirement thus there is little reason to consider outsourcing. Only when secondary processes such as drilling, finishing, welding or assembly are required does it make sense. Cut and sew projects are almost always labor intensive and should be considered for low cost country destinations.
Shipping, freight and lead times are a key consideration. For time sensitive projects, ample lead times are always a concern. Given that it takes a minimum of 30 days to transport inventories via container, if you don’t have well thought out demand planning there is a risk of supply chain disruption. Freight should not exceed 10% of your total cost of goods. This means if you don’t produce $25,000 of value on a 20 foot container--$50,000 on a 40 foot container, the equation doesn’t make sense.
Startup cost and learning curve. Working with reputable China factories often translates into many hidden development benefits. We manage all types of projects that receive the time and attention of highly capable factories as they assist in building prototypes, making necessary modifications, and ultimately producing finished versions—activities that sometimes take 3-4 months. Try walking into an established factory in the U.S. and getting the same level of support without an established track record for your product. When time to produce, the many tedious supply chain activities such as raw material purchases, planning and inventory management all are borne by the contract packaging partner.
Intellectual property is always a key concern of product marketers. If someone tells you there is nothing to worry about with China stealing your innovation, avoid dealing with that person. The way to mitigate this risk is by understanding the culture and reputation of the factory manufacturing your product. We carefully scrutinize every organization with whom we work in an 8 step factory approval audit. This means we have checked references, have a full understanding of the companies’ corporate philosophies and a comprehensive knowledge of their core competencies. Most importantly though filing an international patent or at very least U.S. patent is the single greatest form of protection for your innovation.
Time. Do you really have the time to manage manufacturing, quality control and logistics in the U.S. let alone China while attempting to establish and grow your market and brand equity? Building awareness and demand for a new product in the U.S. market is a time consuming, challenging and sometimes daunting process. Having a trusted source in the ground at the point of manufacturing is the most feasible and logical way to grow a business. Find a partner who is registered with the Chinese government, experienced in manufacturing and has your best interests at the forefront of every step of each project.
David Alexander is President of Direct Source, Inc a leading Contract Manufacturer with offices in Shanghai and Florida
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