Executive Briefings

The Total Cost of Ownership in Outsourcing to China

As purchasing manager for the North American arm of Japanese auto supplier Takata, Fred Heegan used to feel pressure to shift manufacturing to China. But when a customer pointed to a lower-priced Chinese part, Heegan would talk about the added challenges of quality, logistics and engineering changes. "There are significant hidden costs to having supply lines that extend to China," says Heegan, whose company manufactures auto parts in the U.S. and Mexico.
Heegan now looks like a visionary. A growing number of companies are moving beyond the usual considerations of labor and raw material costs in deciding where to produce goods to calculate the "total cost of ownership." That means tallying expenses associated with things such as storage and delays. By this light, the so-called China price, which always seemed to be at least 40 percent below U.S. costs on everything from bedroom furniture to telecom gear, isn't so low. In fact, China's once-formidable edge in manufacturing has all but disappeared in some industries, according to a new study.
Source: Business Week

As purchasing manager for the North American arm of Japanese auto supplier Takata, Fred Heegan used to feel pressure to shift manufacturing to China. But when a customer pointed to a lower-priced Chinese part, Heegan would talk about the added challenges of quality, logistics and engineering changes. "There are significant hidden costs to having supply lines that extend to China," says Heegan, whose company manufactures auto parts in the U.S. and Mexico.
Heegan now looks like a visionary. A growing number of companies are moving beyond the usual considerations of labor and raw material costs in deciding where to produce goods to calculate the "total cost of ownership." That means tallying expenses associated with things such as storage and delays. By this light, the so-called China price, which always seemed to be at least 40 percent below U.S. costs on everything from bedroom furniture to telecom gear, isn't so low. In fact, China's once-formidable edge in manufacturing has all but disappeared in some industries, according to a new study.
Source: Business Week