What’s the Real ‘China Price’

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

the doctor asked me to look at an article over on Supply Chain Brain titled “What’s the Real ‘China Price’“. I, somewhat grudgingly, decided to look at it. I say grudgingly because I thought it was going to just be another article listing all the additional and surprise costs that people incur when the buy from another country. I used to get them all the time when I was at HP. My role then was to set up overseas sourcing offices to make it easier to work with low cost suppliers. Believe it or not, HP was insular in the late 80s and subscribed to the American Honda philosophy of keeping your suppliers nearby. Obviously, they have moved away from that philosophy. So has Honda.

This article wasn’t too bad. The more primitive versions say things like “cost of letters of credit” and “six week shipping time.” It didn’t do that. But it was very vague and general. It mentioned some overseas sourcing projects that didn’t go well. It didn’t mention domestic projects that didn’t go well. The big message was here:

Having jumped on the China bandwagon, a manufacturer finds its risk factors soaring. Suddenly, it’s a lot more difficult to cover up for glitches in the supply chain. Safety stock levels begin to rise, canceling out the savings that were realized through just-in-time supply strategies. High-priced airfreight becomes a frequent fall-back position. And managers “spend countless hours in business-contingency exercises that are about as valuable as the binders they sit in,” said Jim Miller (a VP at Sanmina-SCI).

And the conclusion was:

Offshoring is not simple — and quite frankly, it’s not always the right answer“.

Well, of course it’s not simple and it’s not always the right answer. A long distance flexible supply chain using ocean freight isn’t possible. However, when it is the right answer, those who can handle the complexities successfully will have a big advantage over those who can’t. “It’s too hard” isn’t a formula for success. To be self-serving here, could I suggest some training?

To leave generalities for a minute, how did we handle this reluctance at HP? Here’s what we did in the sourcing stages when looking for suppliers.

1. Eliminate potential suppliers who we didn’t think would meet our quality and on time delivery requirements (and other standards such as labor practices and environmental stewardship). Every purchasing company has a level of late deliveries and supplier quality failures that they know how to handle. The good ones tighten their standards continuously. Bringing in a substandard supplier is a non-starter. But don’t tell me that there are no suppliers in low cost countries who produce good quality.

2. The best looking surviving suppliers were given a rigorous landed cost analysis. It had about twenty line items in it.

3. The top suppliers on landed cost were given a risk analysis. That would compare the lowest landed cost supplier to the landed cost of a not-quite-so-low cost supplier and see how much had to go wrong before the choice of the low cost supplier would turn out to be the wrong decision. Exactly how much would have to go by premium freight? How much would a currency have to appreciate? How much extra procurement overhead would be required? And, never forget, something could go wrong with the second best supplier too. The main purpose was to bring risks out into the open and look to see if it was realistic for them to happen.

So, bottom line, it’s an OK article. It really doesn’t get as specific as it should but it doesn’t perpetuate a bunch of nonsensical myths either. Worth a read.

Dick Locke, Global Procurement Group.

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