China Sourcing: Be VERY Careful How You Measure Savings

Even after all these years of the global sourcing evolution and rising China prices, I still can't believe what I read from some consultants when it comes to on-the-ground savings numbers in the manufacturing area. Take a recent post over on Procurement Leaders Blog by Paul Teague. In it, Paul interviews a consultant that suggests in China that the 65-80% savings were "once common" has now dropped to "35-50%" in certain product categories. In looking at numbers of this, we should all stop and pause for a moment. Because as much as we want to believe such an RMB savings nirvana is possible, it's not, when you begin to look at China prices on a total implemented cost basis factoring in areas like added inventory carrying cost, currency fluctuation (and hedging, when buying in RMB), tax/tariff/duties, shipping costs and delays in corrective action requests (e.g., spotting a problem in three weeks versus three days, owing to transit times).

Even more important than figuring out savings on a total landed cost basis is defining what constitutes savings in the first place. Let's knock down that "35-50%" number to 20% for the sake of implemented savings argument (and a rising 20% at that, owing to labor costs, a slowly appreciating RMB, rising surcharges on shipments as oil prices appreciate, etc.). At this more realistic number, even for spend that fits the China spend profile perfectly (i.e., the part/component/finished product fits in a shoebox, has significant value-add rather than raw material price composition, etc.) chances are that other countries are likely to be nearly as competitive and may offer other advantages as well. Suppliers in countries from Mexico to Estonia to India to Vietnam can often come within striking price (and sometimes better) depending on supply category once you begin to look at the China price on both a total price and evolving basis.

In addition, when it comes to measuring savings with China sourced goods, companies should also factor into account whether or not they're less responsive on a supply chain basis as well as the negative hit they've taken from a working capital perspective, owing to both payment terms and inventory requirements. But above all, please, please, don't take China (or any other LCCS savings numbers) on face value. Don't look at a price quote that first appears 35% less and think you're going to realize even half of the savings without factoring in all of the total cost elements and weighing the supply market alternatives.

- Jason Busch