China - An Option For Outsourcing
China can be a good option for outsourcing, although it can be more complicated than it first seems. Many firms have chosen China as the main destination for outsourcing because of cheap labor and because supplies are readily available. In fact, many U.S. based suppliers have moved there to take advantage of the trend.
Another reason to consider China for outsourcing is the opportunity to penetrate into one of the world’s largest markets—-China itself. Many U.S. suppliers have discovered this market access as a benefit to offshore manufacturing.
Currency is another consideration. China’s currency is pegged to the U.S. dollar which makes for or lessens the threat of currency fluctuations between the US dollar and Chinese Yuan. Other offshore options may have only local currency options which will present real currency risk. This can make little decisions harder on a day-to-day basis since currency fluctuation becomes a critical cost component.
Logistics may prove a very challenging issue including lead times, forecasting, and communication. If there is a problem with shipped products received in the U.S. when the container is opened, additional time may be required to repair the items on the spot. Generally, it is not practical to ship containers back and have the items repaired in China because of the time and expense involved. Depending on the value of the product, it may be more cost effective to discard the product and have a new shipment which must be sent via airplane at higher transportation cost.
Forecasting of demand is crucial because of the long lead times, and a change in demand could result in the company dealing with too much or too little inventory. Too much inventory means high storage costs, and too little inventory results in an increased wait time and decreased customer satisfaction.
Finally, a problem when outsourcing is communication for several reasons including language barriers, time zone differences, and cultural differences. Communication between the headquarters and the Chinese outsource partner can be done via teleconferencing and videoconferencing. Even this is hard to plan considering the huge time difference of 15-16 hours. The language barrier is addressed by managing China suppliers using Chinese speaking management who know the language and understand the culture. The cultural differences such as holidays, beliefs, and traditions also affect operations.
Outsourcing is an exciting option to a firm’s business model. A key question that you may face is how extensive should you outsource and what is the stopping point? By managing cost considerations, language and cultural issues, and quality issues, you can effectively outsource to China.
Dr. Joe Greco is Director for the Center for the Study of Emerging Markets (CSEM) located in Fullerton, California. As part of the College of Business and Economics at California State University, Fullerton, CSEM was established to promote the flow of global information and technology between the academic and business communities. In particular, CSEM studies offshore outsourcing and it economic and cultural impact on U.S. based emerging markets. You may contact Dr. Joe Greco at 714-278-4125 or csem@fullerton.edu or at http://www.thecsem.org
Tags: china, cost reduction, Iindia, manufacturing, offshore outsourcing, Outsourcing, subcontracting
