Are You Leaving Money On the Table? Part 5 – Conclusion
September 13, 2016
Let’s look at the whole picture: How much does China sourcing support really cost you?
Looks like this series has created quite a stir. I appreciate the feedback, especially from the last blog. Since this is the last of the series, lets do a quick re-cap. The series addressed the fact that all importers need a support system in place in China to protect their interests while directly sourcing from Chinese factories.
- The Introduction voiced the oft-repeated concern of: “How can we improve our China sourcing program?”
- Part 2 covered the importance of good communications and addressed the advantages and disadvantages of dealing with Trading Companies.
- In part 3, we learned the value of having good Sourcing Agents
- Part 4 focused on the pros and cons of having a Sourcing Office of your own.
Now let’s bring this series to a conclusion and examine the purely monetary aspect of the China sourcing support, are you leaving money on the table? If so, how much does your China sourcing cost you? How does it impact your bottom line?
To calculate the costs, we must first define what they are. Broadly speaking, there are 2 types of costs: direct and indirect costs.
The direct costs of China sourcing are easy to calculate: they are the costs associated with COGS (costs of goods sold) and beyond, meaning that you are looking at the difference between how much the China factory charges for the goods, and what you are actual paying for.
The indirect costs are more difficult to evaluate, they include:
- Efficiency costs: i.e. Costs related to lack of performance on service, quality, and delivery.
- Management costs: Costs related to supervision and communications, including
- China travel costs, the frequency, efficiency and length of each trip
- Special USA interface costs for China, i.e. Hiring a dedicated Chinese speaker for your USA office
- Phone calls outside office hours. Direct costs and resource costs.
- Resource costs: i.e. How much time does management spend on China issues.
- Other costs: Kickbacks, facilitation fees etc. on the China side
Although the above indirect costs can be considerable, they are hard to measure, so we will ignore them for this analysis and focus only on direct costs.
So how much money is there on the table?
Ok, so lets use numbers to make things simple and figure things out. Lets pretend you are an importer buying an annual amount of merchandise of $5,000,000. What would your costs be if you used the 3 different approaches?
- A Trading Company will cost you say 15% or $750,000 per year. (Could be more: Trading company margins vary based on factors such as product complexity, volume per order, number of SKUs, need for special handling, services required, repetitiveness of the program, how long they have been doing business with you, etc. Usually the margin is not specified, it is the price that is negotiated. Often they will make more margins on some products, less on others. Overall, the margin for manufactured goods ranges from 5% to 35%.)
- An China sourcing agent will officially cost you $250,000 (Assuming 5% commission for a business this size. This percentage of commission will also vary.)
- Your sourcing office will cost you about $250,000 year. (Assuming a small team (about 3 people) to handle this size program.)
Conclusion: Keep in mind that each approach is valid and can be justified by the services and other benefits you get from the intermediary. But each has a cost that can be overlooked. Would it be worthwhile asking yourself if you can do something about saving some of the money you are paying?
- Trading Company: Are they really worth $750,000 per year?
- Agent: How much “bang for your buck” are you getting for $250,000? Would your own office not be a better long-term investment?
- Your sourcing office: We think this is your best bet because, with a good management system you can perform just like a Trading Company, and save $500,000. It will cost as much as an Agent, but the office model is more sustainable, reliable and predictable. And it is likely to address your indirect costs as well. Does that make sense?
What are your thoughts? Are you getting a reasonable return on your China sourcing investment? Are you pleased with your current China sourcing system? What have you learned from this series that will help bring your current system to a higher level?
At China Performance Group, our mission is to create wealth for our clients. To learn more about optimizing your China Sourcing operations, contact us here.
by Guerschom Francois