How does sourcing products from China affect your finances?
Several businesses around the world acknowledge that sourcing products from low-cost regions such as China leads to direct savings in production costs, which allows companies to improve their finances and stay competitive.
China has been the world’s manufacturing hub for about 15 years now. It started small, mass manufacturing several of the goods seen at dollar stores and the like around the world. But over the years, it has refined its manufacturing expertise, and now some of the biggest brands in the world manufacture in China. The country’s factories now manufacture consumer electronics and accessories, automobile parts, clothing, lighting, sports and recreational goods and so on.
As a small business owner who may be examining, for the first time, the idea of purchasing products or components from China because of the cost benefits, it may not be obvious to you how sourcing from China works, and how it can improve your company’s finances. In this article, we address how product sourcing from China actually works for you.
1. Sourcing products from China lowers manufacturing costs
If you are a business owner or an entrepreneur, the product whose manufacturing you are looking to outsource is:
1. Either already part of your inventory and you are looking for a cheaper way to source it, or
2. You have a business idea for a new product that you have designed and want it custom-made at a competitive cost.
Here is a quick example first to illustrate one way how manufacturing in China lowers costs.
You may have bought a bottle of water at the gas station for a dollar. But when you go to Walmart or Costco, you buy an entire case of that same brand of water (24 bottles) for less than $10. This reduces the unit cost of each bottle to about 42 cents.
Manufacturing from China works the same way because of the volumes that are involved. The higher the volume of the product or component, the lower the cost.
Two, while it is true that some domestic manufacturers also have the capability of producing your product – and must be doing so already – manufacturing in China has multiple advantages over them because labor and general overhead costs are lower, allowing these factories to manufacture your product at competitive prices.
Three, Chinese factories have proven production capabilities to manufacture products in large quantities. Not only factories, entire regions in China have been developed keeping exports in mind so that everything moves seamlessly – raw materials to factory, and finished goods from factory to port. This increases the supply chain efficiency, which also lowers costs.
Finally, while it is true that the costs of raw materials, labor and other overheads in China have risen over the years, making manufacturing more expensive, these costs have also risen in western countries. Thus, China still remains one of the cheapest locations to manufacture in.
Chinese companies also have the ability to manufacture and to meet the quality standards expected by the West. This is one thing other emerging low-cost regions such as Vietnam and Cambodia do not have much expertise or experience in yet.
This brings us to the next point.
2. Is everything suitable to be manufactured in a low-cost region?
The answer is: No.
Not all products are suited for manufacturing in a country half-way across the world.
As a business owner, you need to be smart about what you start outsourcing from China so that you can maximize your gains from doing so.
A good way to start is to take a close look at your complete inventory. Products and components that you should choose for your outsourcing project must have a long shelf-life and have a large enough dollar value to make a difference to your finances. To maximize the benefits, choose fast-moving products or components that will not be outdated next year.
Volumes are also important for your outsourcing project to succeed. This is for the simple reason that almost all Chinese factories have something called a minimum order quantity or MOQ. This is the minimum production order the factory will accept because it does not make the effort worth the factory’s while if the order is any lower.
But MOQs can change, depending on the complexity of the product. The more complex the product, the lower the MOQ and vice versa.
As a business owner, you must pick the right product to manufacture not only because large volumes means a lower price per unit, but because outsourcing to China, especially for the first time, can take a lot of time and effort and you will want to make sure that the product is worth it.
This is not to say, however, that you should re-examine your decision to outsource to China because the process seems complicated. Outsourcing manufacturing to China is extremely rewarding if done well.
This brings us to the next point: How can it be done well?
3. How you can save money and minimize risk by hiring a sourcing specialist
If you do not know anyone in China, looking for a manufacturer there can be akin to hunting for a needle in a haystack. In fact, people who are familiar with sourcing from China often say that the country should not be seen as one region, but several regions.
For instance, different regions specialize in different products. You will find electronics manufacturers mainly in Guangdong province, textile manufacturers mainly in Zhejiang and Jiangsu, metal products in Zhejiang, Guangdong, Jiangsu and Shandong provinces and so on.
A good sourcing specialist will know all this and more.
A sourcing specialist is a person or firm that will manage your entire sourcing process – from identifying the supplier, to requesting for quotes, assessing quotes, negotiating prices, reviewing your designs, getting samples made, finalising the supplier, overseeing the production process, inspecting quality, checking packaging and getting your consignment ready for shipping.
Sourcing specialists are useful especially to smaller businesses because often, when businesses start exploring whether they should manufacture in China for the first time, they need to allocate manpower and financial resources towards the project. For instance, a team will need to be set up to take charge of the project.
As several sourcing experts say online, the sourcing process must involve at least one visit by the business owner or their team to China to verify whether the shortlisted factory or factories are indeed who they claim to be; and that they have the production capabilities required to manufacture your product.
Depending on the nature of their outsourcing project, some companies also set up an office in China to help with the project.
All this costs money and time (which, some will argue, is also money).
While bigger companies may have the extra resources to do this, smaller companies that operate with small teams and tight margins will have to extend themselves to set up dedicated teams for such a project.
This is where sourcing specialists – who have teams based in China – come in. For a fixed fee, which you could budget for and add to the cost per unit of the product you are looking to manufacture, these specialists act as your feet on the ground, your eyes on the factory floor, looking after your interests at every step of the way.
A China sourcing agent will help you cut short the time taken to complete the entire process. They are likely to search for suppliers more efficiently than you will do yourself because they are familiar with the country, its language and business culture and possibly even already have a bank of trusted suppliers they can tap to find a suitable manufacturer for you. Among other things, they are also familiar with cultural differences with regard to communication styles between China and the West.
As in any other sphere of life, this domain knowledge helps these agents negotiate the ups and downs of starting your sourcing project efficiently, minimizing the chances of costly mistakes being made, and increasing the chances of success from the word ‘go’.
Because these agents work as your representatives on the ground, they will save you the expense of setting up a dedicated sourcing team or even opening an office in China!