Top Ten Pitfalls to Avoid in Chinese Outsourcing - #6 Not Identifying All Costs

#6 - Not Identifying All Costs

This is a relatively easy one to describe and avoid. The unit price of an item quoted in China is only the beginning. In addition are tooling, sampling, freight costs to the port, ocean or air freight charges, inland freight from destination port to delivery location, duty and possibly quota and customs inspection charges. Within the charges from the freight forwarder are often things that need to be identified early or they can be surprises when the bill arrives. Port charges are one item that forwarders don't often include in their quotes.

In addition, importers should consider the working capital costs of sourcing in China. Initial terms are often 50% payment due with the order and the balance due before shipment. Inventory carrying costs increase because you usually have to buy higher volume in China than you would from a US source to offset freight charges and realize labor savings.

Finally, importers should consider the potential cost of errors and delays, and the cost of administering your outsourcing program. OPS America can reduce or eliminate these costs.

To address pitfall #6 companies should set clear cost-savings targets in their outsourcing plans. We suggest our customers target 25% after freight with a very short payback period for tooling costs. From there we can do better or decided to move forward with less. Either way we do it intentionally and with an understanding of the implications.

In addition companies should plan to start their outsourcing programs small. The companies that run into problems start with a key item or start with a make-or-break new product project with a definite launch deadline.

Focus is Hard

We have a potential customer who is not clearly a good fit for us. They already have a facility in China that exclusively produces their products. They don't own this factory, but it works only for them. They do have an office in Hong Kong with their own employees.

So, why did I even spend any effort on them? Well, they are large and had a need we could fill. Also, I had contacts in the company. We went into the deal thinking we would never be a strategic partner, but even the scraps of this customer would be good business.

However, as OPSA grows we are having to focus more on our target customers in order to manage our growth. We've quoted about six projects with this potential customer totalling a significant amount of time and effort. We still have one project in progress that we will finish. If that project doesn't work-out and lead to more that fit us, we'll walk away. In the meantime we've decided we will not take on any new projects for this company.

Personally this is a really tough call. It takes a great deal of effort to cultivate a new potential customer. I know I should focus my efforts on finding companies that fit us well, but frankly, most of our new customers come from referrals from existing customers or other contacts. We haven't had to do any prospecting, although I still do some at times and it has resulted in a few opportunities. When you work exclusively from referrals you end-up working on whatever comes your way. It's great that this has been enough to fuel our growth, but I want to work on clients that will really get value from our model. Those companies are best found by looking for them specifically, not by hoping the companies referred to us are a fit.

It's time for focus more clearly for me. Although we will always follow-up on referrals, I am going to put more effort into prospecting this summer and fall. If the referral doesn't look like a good fit, I'll move on much more quickly. I'll keep you updated on how it goes.

Today's Lesson - Don't Assume Anything

I have a very good customer developing a new product in one of their divisions. This new product is a cover used in outdoor applications. We are at the point of pre-production and determined today that the material that has been received at the factory is not acceptable. The customer sent material from the US early in the process for us and the factory we are using to find a local equivalent. We found one that was approved and made a prototype for testing.

After several weeks of testing the customer let us know the material was approved and we should move forward. This week we sent them a piece of the production material and they decided to do a test of the waterproof capabilities. Of course, the production material is not as water proof as the US material. They tested the prototype and found it also is not water proof enough.

The customer realizes they should have checked the prototype for being water proof before approving it. They said they were more concerned with durability and performance and ASSUMED the material was as water-proof as the US material.

Luckily we still have time to fix the situation, but it will impact the planned development time line. The lesson for this customer and all companies sourcing in China is - DON'T ASSUME ANYTHING. Test for all relevant performance factors. Our engineer and the factory came up with what they believed to be a good local equivalent to the US material. It was a similar pattern, color, weight, durability, and had a similar water-proofing mechanism. During testing I did ask to make sure the customer was testing the prototype in different weather conditions, but I didn't specifically ask about a water -proof capabilities test.

The result is we have more work to do with the factory. I will be in China in June to help with this situation, among other reasons. As my partner Dan always says, "If it were easy anyone could do it."

Sichuan Earthqauke Impact on Metals Markets and Availability

The magnitude of loss from the earthquake is very difficult to comprehend. I watch and read all I can about it. The numbers of dead, wounded, and homeless are heart wrenching. Our thoughts and prayers go out to all those in the affected areas.

As rescue efforts change to recovery and reconstruction we begin to turn our attention to business again as it will be the driver of recovery, long-term, for the people of Sichuan.

The article below discusses the impact of the earthquake on metals markets and availability. We are hearing varied reports on this, as can be expected with such a large disaster. On one hand we are hearing the availability of aluminum and zinc will be reduced and prices will spike in the short-term. We haven't seen this yet and other reports say we won't. The article comes down on the latter side of the spectrum.

http://www.canadianbusiness.com/markets/headline_news/article.jsp?content=b052164A

Soon we will go back to our series on pitfalls to avoid with Chinese outsourcing.

Sichuan Quake Disaster

Today it doesn't seem appropriate to comment on Chinese manufacturing and the economy at a time when so many have lost their lives, loved ones, and homes in Sichuan province. I've written before about the growth that will take place in cities like Chengdu as development moves west. Today that region is in crisis mode as many people have been lost and many more are not accounted for.

Everyone at OPS America offers our condolences to the families affected by the tragedy.

China's Producer Price Index up 8.1% in April

We take a break from the series on pitfalls to note an important economic indicator released today. China's producer price index was up 8.1% from April 2007. The link to the AP article on this is below.

http://ap.google.com/article/ALeqM5jrKONLCiG5D4aMKAE3CcIZv2rdrQD90I4H900

This is bad news for companies sourcing in China and the Chinese government. As the article notes, inflation can be a contributor to further unrest.

Steel was up 25% to 41%. Energy (coal) was up 20.9%. This is a tough time. Factories, service firms (like OPSA), and US companies sourcing in China that can hang tough in this environment will be stronger for the experience when things calm down.

Top Ten Pitfalls to Avoid in Chinese Outsourcing - #7 Not Knowing Who's Who

#7 Not Knowing Who's Who

It is common practice for trading companies in China to represent themselves as owners of the factory. This can even happen during a tour of the factory as it will appear the trading company representative has an office there and that everyone knows them. Don't be fooled. Trading companies represent the interests of the factory, not the potential customer.

If you don't know whether you are dealing with a trading company or the actual factory you break one of the main rules of negotiation - know who you're dealing with and what authority you have. Trading companies will agree to everything only to come back later and change the agreement. Try to work with decision makers, which means either with a factory or a service organization that is upfront about who they are and what services they provide.

Ways to know who you are dealing with include asking lots of open ended questions, reviewing the product line of the company (trading companies offer wide ranges of items - many more than one factory or a group of factories in one market could offer), and asking for references. However, the best way to evaluate who's who is to visit for yourself or deal with someone who's on-the-ground in China to work for your interests.