China is not currently a viable option for highly specialized manufacturing produced on custom equipment, such as application-specific copper-wrapped coils and high-speed connector assembly. These types of processes often require specific technical knowledge of product engineering or equipment design that is not generally available among suppliers in new procurement markets such as China. By contrast, “commoditized” processes such as stamping, casting, and manual electronics assembly can be handled by almost all suppliers.
Sourcing subcomponents in China and maintaining technology-intensive activities in more highly skilled domestic factories, in many cases, yields a better total cost return than procuring the total product. Technology driven processes often need significant oversight to maintain process control. That frequently can be achieved only in sophisticated plants in developed countries. When factory processes get out of skew in China, yields decrease and the resulting scrap (as well as logistics costs) can quickly overshadow savings generated by lower wage rates.
Although products made with the least complicated, most mature technologies are the best choices for sourcing products from China, the nation’s suppliers continue to develop increasingly sophisticated skills. As a result, more companies are sourcing process-sensitive products, such as rubber and machined parts, from China–a good decision when other critical procurement dimensions, such as lead time, engineering changes, and labor and transportation costs, favor China.
By analyzing these five critical dimensions for each unique procurement initiative, companies can better understand their geographic sourcing options–which products are candidates to be sourced from low-cost countries and which need to be purchased from more developed markets.
If a low-cost country is appropriate, assessment of lead times can help establish which commodities can be sourced from remote low-cost countries (such as China or India) and which need to be purchased more locally from Mexico or Eastern Europe. Execution of this assessment requires going beyond typical procurement piece-price analysis. It requires the involvement of engineering and manufacturing units to define the total supply chain requirements of purchased products.
Even with all of the factors that must be taken into account, China remains one of the most desirable sourcing opportunities. Its wage advantages are not likely to be eliminated anytime soon, and its skills as a supplier and manufacturer will only grow stronger. But as with any other procurement effort, obvious costs, such as labor, are not the only factors to take into account.