How to Successfully Outsource Manufacturing to China – Part 1

Getting the benefits, avoiding potential problems
By Robert Levy – CEO TFGUSA
© Copyright 2017

Introduction

What is Outsourcing?
The U.S. Bureau of Labor Statistics defines “outsourcing” as “the movement of work that was formerly conducted in-house, by employees paid directly by a company, to a different company.” If that “different company” is located in a country outside the U.S., “outsourcing” becomes “off-shoring.”

This “How to Successfully Outsource Manufacturing to China” document refers specifically to “outsourcing manufacturing in China” instead of “off-shoring” in general.

Why Outsource Manufacturing to China?
Companies outsource manufacturing for components, parts, and processes for many reasons. Outsourcing can be especially beneficial for companies entering a new market and for start-ups. Key benefits include:

• Reduced cost of purchased materials and manufactured components
• For start-ups, lower upfront-investment costs, such as a reducing or eliminating the need to establish a manufacturing presence on your own
• Labor costs are the responsibility of the supplier rather than the buyer and can be more easily flexed to adjust for variations in demand
• A wide variety of manufacturers from which to choose, covering multiple processes, multiple products and with the ability to handle both large and small scale production needs

Why China?
Lowering manufacturing and related costs is a major reason to outsource manufacturing to China. A second reason worth noting is an improved Chinese legal system.

A January 2016 article in Entrepreneur magazine notes, “the lower cost of manufacturing in China is an enormous ‘pro’ as to why you should manufacture there.” The article acknowledges, “there are probably some instances where, when you factor in shipping and duties, the costs of manufacturing domestically are possibly competitive. But, generally speaking, it’s cheaper to manufacture in China (and for a variety of reasons).”

Do it yourself

When outsourcing manufacturing to China on your own make sure that you…

• Are thoroughly familiar with all applicable technology import regulations: Many outsourcing transactions involve the transfer or license of intellectual property rights, technology, software or know-how to the service provider
• Retain the services of a legal firm specializing in international law and intellectual property. You may need legal assistance due to the difficulties with project management and/or the loss of control of the manufacturing process
• Prepare for the risks of unauthorized disclosure and counterfeiting of “intellectual property”
• Budget for the possibility of costs to certify and/or visit the manufacturer in China
• Closely track currency fluctuation which may negatively impact your bottom line
• Carefully select and develop relationships with reputable outsourcing companies, and decide exactly what work is best outsourced
• Organize systems and procedures to coordinate work-flow processes and establish the technical infrastructure (both in China and in the US) to support the flow of documents and information
• Continually monitor incoming product to ensure ongoing compliance with your requirements
• Have a native Chinese speaker available who can help you with the language and communication barriers
• Allocate time in the evenings to address any manufacturing questions or issues to allow for the time-zone differences
• Learn the Chinese holiday schedules and how they affect the manufacturing process
• Understand the logistics requirements to bring products from China back to the US – there is a large difference between the costs of full-container load shipments versus partial-container load shipments versus air shipments
• Understand that the pricing of shipping is demand-driven and can fluctuate significantly at different times during the year as can the overall time to deliver the product
• Understand the import documentation requirements and costs when brining product back to the US
• Are prepared to stock buffer inventory to account for any delays in delivery

Check back next week for insight regarding how you can eliminate the anxiety of outsourcing.