Key considerations:
The total labor content (direct and indirect) of a product is the primary driver for China procurement savings. For a product with a large labor component (i.e. 25 percent or more of the product cost structure), low Chinese wages represent a meaningful benefit. In these cases,
the labor savings—applied labor hours multiplied by the difference in the labor rate—can be significant. But for some products, such as shoot-and-ship injection-molded plastics, for which one operator manages several highspeed machines, the labor requirements are too low for China sourcing to be the best option.
Although overhead savings are hard to project, frequently real cost differentials can be realized in China. Local labor rates are embedded in the price of many of the goods and services that are critical components of overhead costs. And many suppliers use local machinery, which can also cost as little as half the price of imported equipment.
Copyright 2007, CF-Asia.com
Savings on raw materials in China are possible when these materials are locally sourced from competitive suppliers. Examples include electronic components and some lower-end steel grades. However, when Chinese suppliers have to import materials—such as high-quality steel alloys—there can be a significant cost penalty in a procurement agreement.
Since Chinese labor costs are so attractive, to gain the highest potential returns from a Chinese procurement effort, the amount of labor should be maximized. This sometimes requires including machining and assembly activities, rather than just purchase of components, in the sourcing contract. For example, when an automotive supplier attempted to purchase raw aluminum castings from China, a savings of only 1 percent over buying these items in the U.S. was quoted. But by redoing the bid to include finished machining of the parts, the incremental labor, handling, and overhead (and taking into account the reduced scrap and lighter shipments), the
same supplier realized a 15 percent total cost savings.
The total labor content (direct and indirect) of a product is the primary driver for China procurement savings. For a product with a large labor component (i.e. 25 percent or more of the product cost structure), low Chinese wages represent a meaningful benefit. In these cases,
the labor savings—applied labor hours multiplied by the difference in the labor rate—can be significant. But for some products, such as shoot-and-ship injection-molded plastics, for which one operator manages several highspeed machines, the labor requirements are too low for China sourcing to be the best option.
Although overhead savings are hard to project, frequently real cost differentials can be realized in China. Local labor rates are embedded in the price of many of the goods and services that are critical components of overhead costs. And many suppliers use local machinery, which can also cost as little as half the price of imported equipment.
Copyright 2007, CF-Asia.com
Savings on raw materials in China are possible when these materials are locally sourced from competitive suppliers. Examples include electronic components and some lower-end steel grades. However, when Chinese suppliers have to import materials—such as high-quality steel alloys—there can be a significant cost penalty in a procurement agreement.
Since Chinese labor costs are so attractive, to gain the highest potential returns from a Chinese procurement effort, the amount of labor should be maximized. This sometimes requires including machining and assembly activities, rather than just purchase of components, in the sourcing contract. For example, when an automotive supplier attempted to purchase raw aluminum castings from China, a savings of only 1 percent over buying these items in the U.S. was quoted. But by redoing the bid to include finished machining of the parts, the incremental labor, handling, and overhead (and taking into account the reduced scrap and lighter shipments), the
same supplier realized a 15 percent total cost savings.