Outsourcing to Low-Cost Countries Might Save Money Up Front, But It Raises Issues of Visibility and Control
Over the past decade, China has become the destination of choice for companies looking to slash their manufacturing costs. But newly emerging issues, particularly with regard to quality control and total landed cost, could cause executives to rethink that approach. In a recent paper on global sourcing and procurement, AMR Research, Inc. analysts Mickey North Rizza and Jane Barrett note recent changes in the corporate income tax rate and value-added tax export refund. Those developments promise to raise the cost of most items sourced from China. At the same time, companies are facing a higher degree of risk associated with such products. "More than ever," they write, "companies need to review their low-cost country sourcing decisions as part of their overall global sourcing strategies." Simply by shifting manufacturing to China, AMR says, companies can save between 35 percent and 50 percent on goods and services. But they must also factor in the risk of increased inventory levels due to longer lead times, substandard products and higher transportation costs--all of which can cause businesses to "lose more than they save." The key lies in calculating the total cost of serving a particular market, by embracing the entire supply-chain "ecosystem" from initial product concept to consumption by the end consumer. A viable strategy for low-cost outsourcing will contain many facets, say Rizza and Barrett, "and missing one element can mean the difference between profit and loss."
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