US Make Vs. China Buy
Many electronic parts, assemblies and products are suitable for contract manufacturing in China. Some are not. Careful considerations of the operational trade-offs and the total supply chain costs are needed:
- Developing a cost analysis of US Make and China Buy, based on the total supply chain cost, including critical factors such as risk, lead-time, obsolescence and cycle time variability
- The cost of alternatives, aka “real options analysis”
- Reviewing strategic consideration, such as operational control, intellectual property, working capital investment and the overall supply chain strategy
Why Buy?
Case Example
The China Buy required significantly more labor hours than the US Make, consequently the Chinese labor cost saving was largely offset by increase in labor content.
However, after the capital costs were included, the total cost of a China sourced product was significantly less than the US manufactured product. CAPEX was annualized on a 5% weighted average cost of capital and a 6-year lifespan:
The China Buy required significantly more labor hours than the US Make, consequently the Chinese labor cost saving was largely offset by increase in labor content.
However, after the capital costs were included, the total cost of a China sourced product was significantly less than the US manufactured product. CAPEX was annualized on a 5% weighted average cost of capital and a 6-year lifespan:
|
US Make
$275k capital for new capacity: $14k finance cost $46k depreciation = $60k capital cost per annum |
China Buy
$6k capital for tooling: $300 finance cost $1k depreciation = $1.3k capital cost per annum |
Why Make
The total supply chain cost can be lower in the US is or strategic factors such as control over manufacturing schedules and intellectual property is critical:
Logistics cost can be the key factor that drives an economic decision to not source from China. When purchasing, the reduced purchase cost must be less than the increased cost of the logistics.
Consequently, products from China need a "high value density," i.e. the value of a shipment is high relative to the shipping costs driven by cube volume and weight. 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.
- 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 can be the key factor that drives an economic decision to not source from China. When purchasing, the reduced purchase cost must be less than the increased cost of the logistics.
Consequently, products from China need a "high value density," i.e. the value of a shipment is high relative to the shipping costs driven by cube volume and weight. 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.
US Make Vs. China Buy Analysis
Key cost components to consider for analysis are:
Additional factors to consider for the analysis:
- Manufactured cost (Make only)
- Direct & indirect materials
- Labor
- Production scheduling
- Domestic logistics (Make only)
- Tooling
- Purchase cost (China source only)
- International logistics (China source only)
- Capital asset costs
- Finished goods inventory holding
- Taxes and tariffs
Additional factors to consider for the analysis:
- Annual production or purchase volume
- Raw materials holding (Make only)
- Lead time (both)
- Safety stock (both)
- Supply chain responsiveness
- Obsolescence and trading position
- Domestic shipment size (Make only)
- Production order size (Make only)
- Container shipment size and value density (China source only)
- Purchase order size (China source only)