China Outsourcing (Guangzhou Outsourcing)
December 9th, 2006 by kelvincho
Managed outsourcing means using third parties to manage the development and maintenance of product supply chains between suppliers and customers. This can cover a whole range of products, from established products and engineering and scientific goods, to consumer goods and innovative products. The volume can be low or high. The whole product life cycle can be involved, through assembly to testing. The increasing trend is towards outsourcing new products and prototypes.
Why outsource?
The principal reason is cost reduction. However, outsourcing also provides access to skills, particularly finishing and trade skills, which are dying out in the UK. Outsourcing may also locate you nearer to your end customer. There is a great deal of supply going into China, and logistics managers may be called on to help with manufacturing and distribution in China itself.
The cost savings are generally in labor. For the engineering sector, this can result in up 50% cost savings over the UK. However, logistics will cost more. Most materials are cheaper in China, but some specialist materials can be more expensive.
The UK has a long history of outsourcing to China, but the trend more recently is to gain access to smaller companies with lower volumes.
How to start outsourcing:
1. Investigation. Specify the product requirements and identify possible suppliers.
2. Draw up a proposal. Include forecasts and start-up costs.
3. Sampling. The supplier should produce prototypes to an agreed specification,
4. Test. Make sure that the product meets with your approval.
5. Production order. Agree to the quality requirements and production schedule.
Considerations to bear in mind when outsourcing:
• Product design: The technical details have to comply with EU regulations.
• Materials: international materials may be available, or it may be appropriate to use Chinese equivalents, as long as they comply with regulations.
• Quality assurance: This is a key concern. Larger companies have inspectors who will check the quality of supplies. It is very important that products are inspected before the goods are shipped.
• Delivery: The schedule of manufacturing and shipping require consideration. For example, a shipment by sea can take five weeks to arrive in the UK. How will you cope with variation in demand? Air freight is faster but more expensive. An outsourcing manager could arrange for consignment stocking, whereby he will pay for all the goods up front, and arrange for them to be shipped at appropriate times, so that the factory can produce the right amount in advance, without tying up spare cash from the buyer.
• Intellectual property: This is generally people’s most serious concern. However, there are ways to protect your products. Do not have all the components manufactured with one supplier. Components by themselves are generally not valuable. Keep the assembly and testing under the control of one supplier, possibly the outsourcing manager, who is regulated.
• Payment: This is often made in cash. The outsourcing manager can look after this.
In China, you can’t judge by appearances. Many manufacturers start at home. Consider existing industrial centers, which may have specialist expertise. However, manufacturing is expanding out of existing centers to move inland. A lot of suppliers are supplying the Chinese market and aren’t interested in exporting.
Who should manage?
Whoever you appoint should have access to the supplier network. The outsourcing manager can just set up the operation, or can manage the whole process. It is important that they have local knowledge. They need to understand Chinese standards and specifications. Drawings may need to be interpreted. The outsourcing manager may have standard briefs which they can give to the supplier, and can make sure that quality assurance is in place.
With a managed outsourcer you can have effectively a single supplier for many components. With their local knowledge they should be able to offer competitive pricing. They can deal with the logistics, and import/export procedures, making sure that goods are delivered to your location duty-paid, so you pay after you accept the goods.
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