Offshoring or Local Manufacturing: Key Factors to Consider

With global inflation affecting the entire world, and particularly with logistics and freight costs
at unprecedented highs, more and more people are asking important questions about
offshoring:

– Does it still make sense to offshore?
– Is it worth it?
– What factors should I consider before I chose to buy outside the USA?

Accurate answers to these complex questions will require you to investigate the costs of the specific product and the quantities you intend to buy.  This is something we always recommend you do prior to placing any orders.  In doing this analysis, there are two types of costs one must consider: Tangible and Intangible. I break down each cost in more detail below and also list the key factors you must consider to accurately calculate the cost of each, prior to offshoring.

Tangible Costs

To compare costs of an import versus costs from a domestic supplier, you should consider an FIS (Free in store) quote.  This price quote lands the goods in your warehouse.

An FIS quote for imported goods typically must include:

FOB (Free on board) price +

Insurance and freight +

Tariffs (If any) +

Customs clearance fees +

Domestic transport costs from the landing port to one’s warehouse.

To estimate an FIS quote you should consider the following:

– Freight:  You can find transport costs online but consider:

– Sea freight or air freight?

– A standard 40’ container? Or a 20’ container?  Or LCL (less than container load)?

– How many pieces fit into the container?

– Transportation to your warehouse:

– How far is your warehouse from the seaport?

– What size container will you be using?

– Tariffs:

– What is the HTS (Harmonized Tariff Schedule) code for your product?

– What percentage do you use?

– How long is this tariff expected to stay in place?

Intangible Costs

If you think tangible costs are challenging to figure out, intangible costs are, by definition, nearly impossible to pin down. The best one can do is list the potential intangible costs with an explanation for each.

Below I have listed (in no specific order) some examples of intangible costs that are related to sourcing from China.

– Supply chain responsiveness: This is related to supply chain management, which is an issue everywhere (in every location that you source), but it is a bigger challenge if your factory is in China (versus local).

– Obsolescence and trading position: This refers to the risk of placing orders for goods that may no longer be needed when it is time to ship. There could be several possible reasons for this.

– Funding: Buying from China typically requires upfront funding of the inventory, whereas most US-based suppliers will provide terms. This is both a cash-flow and a cost-of-funding issue.

– Managing from afar: Executive time and China travel are some intangible costs that could occur in this category, but there are many more.

– Product Liability Insurance: This may be required by some retailers. US suppliers are insured whereas even if Chinese suppliers are, this non-US-based insurance is often not useful.

– Recourse: If the goods arrive damaged or otherwise unusable, there is little recourse (unless the damage is due to a freight or transit issue in which case it would be covered by freight insurance.) Whereas if you bought domestic, chances are you have not yet paid for the goods.

– Order to market delay: Orders have to be placed months in advance (especially with current supply-chain disruption) whereas US-based factories can deliver much quicker.

– Transit time: Once goods are shipped, they take much longer to arrive than US-based factories.

– “Made in China” label versus “Made in the USA” label: This will have a different impact on different products and markets.

In conclusion, there is a reason why you chose to source goods from China, and that is mostly that you expect to get a value advantage that will enable you to acquire and gain market share and fend off the competition.  No matter where your goods are manufactured, you want to secure that value advantage.  That is why it makes sense to compare domestic sourcing with China imports.

Buying from China should be about 20% cheaper but a simple rule of thumb is that you should get at least a 5% advantage. (Based on FIS costs)

However, as with everything, there are some exceptions to this rule. Feel free to reach out to us if you have questions!

 

By Laura Dow

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