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WESTROM China Industrial Electronics Sourcing

Many products and parts are suitable for sourcing from China. Some are not.

Careful considerations of the operational trade-offs and the total supply chain costs are needed:

  • Completing a US Make versus Buy is critical for good China sourcing decisions

  • Strategic consideration should also be addressed, such as control, intellectual property, working capital investment and building China organizational capabilities and market presence

  • Why Source from China?
    The total supply chain cost of manufacturing in China is lower and/or working capital is preserved.

    Sometimes China sourcing is started to strategically build a China presence and organizational capabilities, in preparation for a China sales & distribution division.

    The total cost is low, as:
  • Burdened labor costs is low – labor, benefit, compliance and regulatory cost
  • Capital costs are low or avoided – buildings, machinery and tooling investments
  • Compliance – lower compliance and administrative costs
  • Quality is equivalent – but only if managed correctly
  • Avoidance of working capital investment in the US can be the major driver of a decision to outsource to China:
  • Outsourcing to China preserves a company’s working capital for investment into projects with a higher return on investment (ROI)

  • Small and medium business may not be able to secure the capital necessary in the US. In these instances the analysis becomes “Don’t Make” versus China Source.
  • Finally, lower labor costs enables the cost structure to shift to a low capital cost and high labor content structure from a high capital cost and low labor content structure.

    Real Life Example:

    5% cost of capital and 6 year lifespan

    US Make: $275k capital asset investment (our customer required new capacity)
    $14k finance cost + $46k depreciation
    = $60k capital asset cost per annum
    China Source: $6k capital asset investment
    $300 finance cost + $1k depreciation
    = $1.3k capital asset cost per annum
    The China Sourcing option required significantly more labor hours than the US Make. However after the capital asset costs were included, the total cost of a China sourced product was significantly less than the US manufactured product.

    Why Make?
    The total supply chain cost of manufacturing in the US is lower or control over manufacturing schedules, finished goods, components and intellectual property is critical.
  • No international logistics costs – transport, customs and management follow-up
  • No tariffs and import quotas – import tariffs and quotas limits
  • Less inventory holding – US manufacturing enables lower inventory holdings
  • Better control – production control, intellectual property, logistics
  • China management – lack of capability or the cost to manage China operations
  • Internal company politics – Poor executive support to source from China
  • Logistics cost is generally the key factor that drives an economic decision to not source from China. When purchasing a shipment, the reduced purchase cost must be less than the increased cost of the logistics.

    As a result, products sourced from China have a "high value density," i.e. the value of a shipment is high relative to the shipping costs. Electronics, clothing & textiles and plastics are good examples.

    "Low value density" products are not suitable for China sourcing. Examples are preformed concrete, building materials and high cube products such as formed polystyrene. The amount of value shipped is low and the increased logistics costs exceed China sourcing cost savings resulting. This results in a higher total landed cost versus sourcing through US suppliers.

    Some products, such as medical devices, can and are sourced successfully from China. However if material control, lot tracking or chain-of-custody are major issues, then China sourcing may not be appropriate.

    Lower control over the production/purchasing/logistics schedules can be a significant issue. However this is most often addressed through better management and increased inventory holdings in the US. WESTROM has the China capabilities to address this strategic issue.

    Intellectual property (IP) protection. While this is a foremost concern often quoted in the popular press, in practice this is an issue in the US operations, rather than China sourcing.

    WESTROM or its directors have been operating in China since 1997. During this time we have observed multiple instances were a US company reverse engineers a competitor’s product, sources it in China and then sells and distributes it into the US.

    However, we have not witnessed a Chinese supplier steal IP and then sell its products into the US market. Not to say that it hasn’t or cannot happen. Chinese manufactures neither have US sales and distribution assets, nor the economic incentives or competency to build a US sales and distribution division.

    US Make Versus China Sourcing Due Diligence
    You must conduct a US Make vs. China Sourcing due diligence. Key cost components for this analysis are:

    • Manufactured cost (Make only)
      • Direct & indirect materials
      • Labor
      • Production scheduling
      • Domestic logistics
      • Tooling
    • Purchase cost (China source only)
    • International logistics (China source only)
    • Capital asset costs (both)
    • Finished goods inventory (both)
    • Taxes and tariffs
    Additional factors affect the costs. Common cost drivers are:
    • Annual production or purchase volume
    • Raw materials holding (Make only)
    • Finished goods inventory holding
      • Lead time (both)
      • Safety stock (both)
      • Domestic shipment size (Make only)
      • Production order size (Make only)
      • Container shipment sizing (China source only)
      • Purchase order size (China source only)