Special thanks to Source One Management Services for this guest post
When cost savings is the main driver of a sourcing initiative, many consider looking at what is available abroad, in countries where both labor rates and material costs are known to be more competitive than in the US. Mexico, China, India, and Vietnam are some places where these costs are generally below US rates. But, outsourcing in these countries involves risks not to underestimate such as quality, logistics, or even business culture. Yes, outsourcing to these countries can result in significant savings but only if you’re well prepared and conduct the initiative properly. These projects require strategic planning, with a clear roadmap to ensure success.
First things first, it is important to know which direction to take before going to market. The question here is: “Which country will best fit my initiative and be the most competitive at manufacturing my products?” Take into consideration labor costs, raw material availability, freight costs, and taxes to answer this question. For example, manufacturing labor rates in Mexico are today more competitive than in China when converted into USD. Therefore, a company located in the US looking to outsource labor intensive goods might want to focus on the Mexican market. However, if a company located in the US is looking to outsource raw material intensive products, China or India might be a better option than Mexico, despite more costly freight charges. Taxes are also to be considered before engaging a supplier in a sourcing initiative. Taxes can be complex and may result in unexpected charges if not properly understood. For example, taxes might be applied to products made in Mexico with raw material originating from Asia when being imported into the US, as per the NAFTA agreement.
Choosing the right country means also knowing the risks associated with it. Suppliers in some countries tend to have access to limited infrastructure, technology or equipment, which can have an impact on quality or production and delivery lead times. For example, India might seem more competitive than China. Indeed, India’s hourly labor cost for manufacturing averages $0.92 compared to $3.52 in China. However, India’s infrastructures, roads and ports are far less developed than the ones in China, which can result in longer lead-times and poorer quality.
Another aspect to consider when outsourcing internationally is the country’s culture. Culture differences can lead to significant impact on a project or business if not handled properly. The best example I like to always bring up is the one about South Korean pilots who had the highest rate of plane crashes back in the 1990 due to a cultural issue. Extrapolated to the manufacturing world, it is easy to imagine how cultural differences and miscommunication could lead to negative outcomes. Hence, it is important to be flexible and be able to adapt to a different culture on some levels in order to minimize risks and maximize benefits.
Execution is key to the success of an international outsourcing project. Once the right target is identified, suppliers must be selected through a rigorous Request For Information (RFI) process, where their manufacturing capabilities, compliance with ISO or other certifications, value added services and experience exporting goods to North America need to be vetted per a set of requirements tailored to the sourcing project. Once the suppliers are properly selected and engaged in the sourcing initiative, making sure they will provide a quote for the material or design you are looking for can be challenging, especially if a language barrier applies. Depending on the commodity being outsourced, samples of the current products might have to be sent to the suppliers in order for them to provide the most accurate quote.
In a recent strategic sourcing event, we were looking to source textile in China. Samples of our products were requested from the very beginning by the suppliers we had invited, even though we provided them with detailed product specification and data sheets. Similarly, samples of the quoted products can be requested from the suppliers in order to be tested and validated. Suppliers that make the cut so far should then be (or should have been) audited through a factory on site visit before you place an order. This can be done by factory audit consultants located in the same country than the selected supplier.
In summary, outsourcing internationally can generate a significant cost savings opportunity, only if prepared and executed correctly. Knowing where to look, how to identify suppliers, and how to effectively execute a sourcing initiative are essential to on-boarding the best-fit supply base. Supplier directories such as Alibaba or TradeIndia are useful tools for identifying suppliers located abroad, but trade shows, like the IMTS 2016, can be an even better option as it allows you to speak directly with the suppliers and get a better “feeling“ of their capabilities.