Manufacturing Sourcing

Outsourcing in Asia

Fri, 25 Dec 2009 23:51:34 +0000

Outsourcing has remained a growing field through good economic times and bad. What makes this such an attractive option to businesses worldwide? What is it about the Asian economies that make them such outsourcing magnets?

There are many reasons for this phenomenon to include the following:

Bottom Line – For most businesses, the first and foremost consideration is the bottom line. Put simply, outsourcing makes the bottom line look good. It offers various cost savings such as a reduction in fixed costs, lower labor costs and savings in research and development. The services and goods offered by such businesses then cost less. As the benefits of the cost savings can be passed on to the public, firms that outsource then have an edge over the competition.

Availability of Labor – Often businesses find it difficult to get a talented workforce that can meet the skills required for their operations without excessive drain on their finances. The large, skilled workforce available in Asian economies makes outsourcing a very attractive choice.

Regain Focus – A lot of the routine work involved in the day to day operation of a business such as accounting often has nothing to do with the product or services offered by the business. Even services such as customer support that are crucial to a company’s product lines can be a heavy financial burden on the company. By taking on these routine tasks, outsourcing allows a company to regain its focus on its core operations

Target New Markets – Outsourcing to Asia has helped several businesses to break into new markets that they had no access to earlier. Outsourcing helps build awareness about the company in the target markets, and it can give great exposure to the products and services that the company can provide to consumers in these new markets.

Customized Services – Outsourcing in emerging markets often offers companies a way to explore the possible customization of services and products for those markets and eventually grab a foothold in them.

A combination of these factors and others have made outsourcing to Asia such a great success that many businesses are turning to this option in an effort to be competitive in the face of such stiff opposition at home.

Asian Outsourcing Controversy

Fri, 25 Dec 2009 22:21:45 +0000

Most people are aware of the negative buzz that outsourcing is creating – particularly in these days of high unemployment. Outsourcing to Asia – especially to countries such as China, India and Philippines has generated some controversy in recent years. Is it really bad for jobs?

Every nation has many advocates for keeping jobs within the country, and when people see the rising numbers of unemployed white collar professionals; it may seem like a good thing to oppose outsourcing. But is this really the best thing to do? The answers to this question can be arrived at by taking another look at why organizations opt for outsourcing in the first place and why, even in these days of fiscal turmoil, organizations worldwide are still resorting to outsourcing.

Contrary to popular perception as being a phenomenon of the information age, outsourcing has always been around. Industries have often chosen to outsource a part of their work for various reasons, the most common of which are lack of in-house expertise and cost-effectiveness. Outsourcing of manufacturing and blue-collar jobs has long been an accepted practice; but with the increasing globalization of services and business operations, many white-collar jobs have been outsourced to Asia too. This has come as a shock to many people who have been ardent supporters of outsourcing. The flight of high-value and high-paying jobs, coupled with the slow rate of regeneration of such jobs, has brought home the fact that this aspect of globalization is not really palatable to most people.

The cry for stopping this flight of jobs has been getting louder, but there is no gainsaying the fact that there are definite benefits to be gained from outsourcing work – it can bring lower the operating costs for one thing, and the end result can be reduced costs of goods and services with a concurrent increase in the purchasing power of consumers. The diversity and savings it brings can make companies more competitive, spawn entire new industries and boost the economy in time in various ways that are not apparent in the short term.

Furthermore, the jobs that have been outsourced are a source of prosperity and upward mobility to many skilled beneficiaries in these Asian countries. These beneficiaries in turn provide new markets. For businesses that outsource, it is a win-win situation too, as they have access to a vast pool of skilled labor that may not have parallels in their own country and more consumers to buy their products.

Of course, nobody wants to be an outsourcing statistic. Such workers have to either be retrained to get other well-paying jobs or to spend a long time on unemployment because similar jobs are not being generated at the same place or pace as they are being lost. Until the worldwide economy picks up strongly, the cry over outsourcing to Asia is unlikely to subside.

Measurements and Metrics

Wed, 25 Nov 2009 01:19:18 +0000

When giving specifications for a product, it is best to give everything in metrics. Doing so will make things simpler, easier and reduce the chances of error.

China, like the rest of the world, has adopted the metric system. The US is just one of the few countries that have not put it into full practice yet. While it is possible to use US measurements, there are almost no advantages to doing so but many potential pitfalls.

With the US still the largest economy in the world and the entity asking for the production the customer, Chinese or other overseas factories are often willing to accept specifications and measurements given in US units. However, keep in mind that this may be the only time that the people at the factory have encountered US measurements and thus they do not have any experience with them.

Usually, the factory will simply convert everything to metrics for internal use and then convert back to US measurements when contacting the customer. This creates another layer of complexity though and increases the chances of mistakes. There is also a greater chance of misunderstandings since people overseas looking at US measurements have no inner sense of what inches or other US measurements represent.

With this in mind and the fact that the metric system is fundamentally more rational and easy to use, it is almost certainly best to simply convert everything to metrics when giving specifications. This will save time and reduce complexity.

Also, metrics have made some inroads in the US so most Americans at least have a concept of what they are and how they work. The same cannot be said for US measurements overseas. It often makes the most sense to only use metrics for products. There is no reason to use two systems when one will do.

In short, metrics make the sourcing process easier, reduce the chances of error and should be used whenever possible.

Sourcing and Communication

Fri, 16 Oct 2009 08:21:19 +0000

Language is often an issue when doing business overseas. While the vast majority of manufacturers in China and other Asian nations that do business overseas have one or more English speaking staffers, steps still should be taken to ensure language differences do not cause any problems.

With English the dominant language of international business, it is generally assumed that business negotiations will be carried out in English. However, English ability overseas varies greatly with each nation. For example, while many in Singapore speak English at a native-speaker level, the English level of the average person in China is much lower.

Even in a nation where the level of English is low, it is not unreasonable to expect there to be at least one person at the company who can converse in English. In fact, the lack of any English speaking staff should be taken as a warning that the manufacturer does not have any international experience. However, one should keep in mind the difficulties of learning a foreign language when communicating.

To avoid communication problems, keep specifications, instructions and any other communications as clear and to the point as possible. Use numbered lists to communicate specifications where practical. Since specifications will sometimes change as manufacturing and other design issues are taken into consideration, it is advisable to keep a master list containing all the specifications and that is always updated with any changes. Confirm the entire list before making the samples or going into a production run.

Considering even those with a good mastery of a foreign language can sometimes misunderstand things without evening knowing it, and that written translation rates are usually reasonable, it may be a good idea to hire a translation service to translate the final specifications into Chinese.

A sample can be worth a thousand words. Whenever possible, sending samples and pictures can be the best way to break down language barriers and insure there have not been misunderstandings when communicating specifications.

When negotiating, keep in mind that the person who speaks English best is probably not the decision maker. Keep orientated towards the decision maker who is likely an older person who may not speak much English.

When hiring an interpreter, make sure the interpreter understands the vocabulary of the industry of the product being sourced.

Also, do not assume that the other side does not understand English and say something they should not hear in front of them. Often, they understand more than they show and sometimes use it as a negotiating tactic.

The same tactic can by used if a member of the sourcing team speaks Chinese. Since most westerners do not speak Chinese, the manufacturer will often assume nobody does and may say things openly in Chinese they do not want the other side to know.

While language does pose some challenges, they can usually be overcome by taking relatively simple precautions.

Sourcing and the Size of Production Runs

Tue, 01 Sep 2009 13:13:36 +0000

When sourcing an order with a Chinese or other overseas factory, a major decision is the size of the production run. Numerous factors need to be taken into consideration when deciding the size of an order. The following is a look at some of these factors.

The amount that can be invested in production is an obvious factor. With economies of scale, it is best the place the largest order one can afford to get the lowest unit cost. Up to a point, the larger the order the lower the unit cost. Also, shipping and other costs tend to be less when ordering in bulk. Shipping by full container gives the best rates. These factors need to be balanced with storage costs, projected sales and the amount the organization buying the product wants to invest.

One factor when deciding the size of a production run is trust in the manufacturer. Sampling is not always a clear indication of the quality of work a factory will ultimately produce. Until the manufacturer has demonstrated they produce quality work on a consistent basis, it is prudent to limit exposure in any single production run and source in smaller quantities.

Time will also dictate how large a production run should be. When time is limited, it is sometimes necessary to do a run that is smaller than would otherwise be optimal.

Setting up a production run requires time and money. Machines and parts often need to be purchased, workers trained and factory floor space set aside. If the manufacturer does not believe the order quantity will generate enough profit to make the production set-up worthwhile, they will simply refuse to take the order. Therefore, while there are a few products that can be ordered by the hundreds, the vast majority require production runs in the thousands, tens of thousands or more.

Suppliers are also often a factor. Buying on the open market is usually considerably more expensive, so materials need to be purchased in bulk from suppliers. Even if a manufacturer is willing to do a smaller run, they may have to purchase materials in much larger quantities than needed for the production run. Since manufacturers are rarely willing to store materials, any leftover materials will be considered waste and will add to unit costs.

The type of product is also a major factor to consider when deciding on the quantity of product to order. Some products, such as plastics, need molds and therefore require some of the largest production runs. Not only does the mold need to be produced, which usually requires a significant investment, but the materials for the plastic must be purchased in bulk. Furthermore, machines need to be set-up to produce the mold.

Molds and tooling are major factors in determining production runs. Since they usually require a significant investment, a larger order quantity may be needed to allocate the set-up costs over more units. If the purchaser is planning future orders to recoup these costs, they should stipulate they will own the tooling.

On the other hand, products such as bags are easier to source and their production runs tend to be less complicated to set-up. They can sometimes be ordered in much smaller quantities.

While every product is different, carefully considering these factors will help in deciding the quantity of a product to order with the factory.

Outsourcing and Intellectual Property

Sat, 15 Aug 2009 00:58:09 +0000

A common concern when sourcing overseas is protecting intellectual property. This article examines sourcing and piracy as well as steps that can be taken to reduce the risk product will be copied.

Due to the many different types of products available in the world, the uniqueness of a product does not in itself make it attractive to those who seek to profit by copying the ideas of others. Products such as the following are most attractive for those engaging in piracy:

1. High tech goods or other products that require expensive research and development to create. They are appealing targets for copying because the one copying the product does not have to invest in research and development costs.

2. Products such as computer software, DVDs and music are attractive piracy targets since they can be copied inexpensively and those copying them are not paying the true production costs.

3. Famous brand names are piracy targets since those copying them are not paying the advertising and other costs that established the brand and its premium pricing.

Less established products that do not fall into the above categories are also victims of piracy. This happens because someone recognizes a unique product or idea that they think will sell exceptionally well. Since the top three types of piracy listed above are primarily a concern for major corporations, this article will focus on the copying of less established products.

Many people mistakenly assume this type of piracy is driven by manufacturers in the country where the goods are being sourced, such as China. In actuality, most manufacturers will not begin production unless they have assurance of receiving payment. Furthermore, they are not in the business of marketing products or predicting future product trends. Therefore, the piracy of less established products is usually driven almost entirely by competitors and others in the countries where the goods are marketed. It is thus unlikely the type of goods this article focuses on will be copied unless a competitor is determined to do so.

Steps to reduce piracy
While piracy of less established products in China is less frequent than most realize, preventative steps should nonetheless be taken when sourcing overseas. These preventive steps include the following:

• For products with a high risk of piracy, follow the steps from the RFQ (request for a quote) phase. This can be done by first breaking down the product and only seeking quotes on its components. The product can then be shown to more manufacturers since none of them will see the big picture.

• Ask any potential manufacturer for a list of their customers to ensure they are not supplying product to a competitor.

• Even though China is not a legal-based society, a simple, direct NDA (non-disclosure) agreement, translated into Chinese, helps eliminate misunderstandings and ensures the manufacturer understands permissible procedures.

• Register brand names as soon as possible. China and some other countries are based on “first-to-register” rather than “first-to-market.” The process, which generally costs less than a few thousand U.S. dollars, can be made much easier with local English speaking attorneys who can usually be found at reasonable rates.

• If the product is very sensitive, the components can sometimes be produced by different suppliers who do not see the entire product. Then, the final assembly or packaging can be carried out at a secure facility either in China or in the country where the goods will be marketed. However, this approach will almost certainly increase costs and can only be used when profit margins are wide.

By understanding the types of goods usually copied and the reasons copying is performed, one can better implement the necessary precautions to prevent theft of intellectual property.

VAT and China Sourcing

Wed, 05 Aug 2009 04:03:42 +0000

Since a nation’s value added tax (VAT) has a direct impact on price and profits, it is important to understand the VAT of the country where manufacturing and products are sourced. The following describes China’s VAT and how it affects China sourcing.

The mechanics of the VAT and its application to China sourcing
While VAT works differently in various countries, it is basically a tax paid on the value added to a product as it moves down the supply chain to the end user. For example, the raw materials for a widget are purchased by a manufacturer and a tax is paid. Then, when value is added to the materials by turning them into a widget, a tax is paid on the added value. Finally, a tax is paid on the additional added value of the widgets when they are sold to the final consumer.

For example, if the VAT is 10% and the manufacturer pays $50 for materials, then $5 is paid to the government. If the manufacturer then sells the widgets for $80, a total of $8 will be paid to the government ($3 additional dollars because $5 was already paid). If the widgets are next sold to the final consumer for $100, the government will have collected a total of $10 (an additional $2 since $8 has already been paid). VAT can also be viewed as a type of sales tax that is paid in part before the goods reach the final end user. Because the tax is paid periodically during the production/sales process, it is more difficult to avoid than a regular sales tax.

In China, the VAT rate is 17% on most goods. However, the government often refunds at least part of the VAT when the goods are exported. The amount refunded varies with the product, and the Chinese government uses the VAT as a tool to influence industry. Usually, the refund is highest on those goods for which the government wants to encourage production (e.g. higher value-added products) and lower or non-existent on products the government is less interested in having China manufacture. An example of this was seen in 2007 when the VAT system was changed and VAT refunds for many high-energy, high-polluting goods were greatly reduced or eliminated.

In its most simplified form, the VAT refund for an exported product works as follows. If the VAT rate is 17%, and the refund rate is 10%, and a $17 VAT is paid, then $10 would be returned to the exporter while the government would keep $7.

The importance of understanding VAT when importing
Importers who do not understand the VAT system are exposing themselves to the following potential problems and extra costs:

The best pricing starts with transparency. When breaking down pricing, comparing suppliers and negotiating, it is critical to know the supplier’s true cost. Without an accurate breakdown of costs with the VAT rate clearly stated, the supplier has more room to manipulate the price.

Some manufacturers may not tell the purchaser about the VAT refund or they may tell the purchaser the refund was at a lower rate that they actually received and then will pocket the difference (it is also sometimes possible to negotiate the customs classification and therefore the VAT rate). To fully obtain all cost savings due through VAT refunds, every importer needs to be fully aware of the classification and rebate for the products purchased.

If a manufacturer lacks the proper import-export rights or VAT processing abilities, they may be forced to rely on third parties who will likely inflate the price and make the relationship with the manufacturer more complicated.

In a gray area of the law, some suppliers are able to avoid the VAT for smaller orders. While this will give the purchaser a lower price in the short term (although this increases the risk the goods will be trapped in China without proper documentation to export them), the importer will suddenly be hit with the tax when their business grows and the order size reaches a point where the VAT cannot be avoided. The tax increase will likely be greater than any discount from larger order quantities.

Therefore, when doing business in China or any nation with a VAT, is imperative to know the classification and VAT for every product and ask the supplier to outline their VAT policies. Doing so will enable the purchaser to avoid unexpected costs or other problems while getting the best price possible.

Manufacturing History

Tue, 28 Jul 2009 11:34:26 +0000

One could say manufacturing began about 7,000 years ago when ancient humans started producing various articles made of stone, wood, ceramics and metal.

From these simple beginnings, manufacturing has progressed over the millenniums into the automated factories we see today.

Before high-quality, mass production in the modern factories we see today could become reality, countless inventions, both great and small, were necessary. One of the most important was the the steam engine invented by James Watt in 1769. It was far more practical and efficient than any other steam engine previously produced. For the first time, people had a reliable, efficient source of power other than water.

As Watt’s steam engine began to be used for textile manufacturing and other purposes, it moved industry away from water sources towards population centers and was highly instrumental in creating the modern factory system. This in turn helped bring about the industrial revolution.

With the invention of interchangeable parts, Eli Whitney added another indispensable component to modern manufacturing.

In 1801, he went to Washington and demonstrated to an astonished audience how standardized parts could be exchanged between muskets. With interchangeable parts, manufacturing was transformed from a usually slow, expensive process of very experienced craftsmen to something that could be done in factories by relatively unskilled labor.

Factories could now manufacture much cheaper goods in larger quantities.

Henry Ford built on the idea of interchangeable parts to create the moving factory assembly line. Factory workers could now spend much less time moving about, and the pace of manufacturing could have a continuous flow.

Ford also broke the manufacturing process down so each worker had a specific job rather than working on the whole car. These processes revolutionized factory production and made possible the cheap, efficient manufacturing that supplies us with the products we need today.

Modern Manufacturing

As the world changes, so does manufacturing. Ideas like “lean manufacturing,” developed primarily by Toyota Motors, continue to change how modern factories manufacture products. After World War II, the Japanese significantly lagged the U.S. in manufacturing. Therefore, they looked for a manufacturing edge to compete with the dominant American factories of the day. Lean manufacturing was a way to reduce waste and increase efficiency in their factories.

The principle behind lean manufacturing is to continuously work to eliminate anything in the manufacturing process that does not add value to the final consumer and improve the manufacturing process. For example, factories and manufacturing are structured to reduce transportation since it wastes time and resources. Organizational changes are made to keep inventories at an absolute minimum to reduce storage costs and increase flexibility.

In the future, these and other new ideas are certain to continue to change factories and manufacturing in ways we never imagined.

Outsourcing

Tue, 28 Jul 2009 08:42:27 +0000

What is outsourcing? Outsourcing has traditionally referred to the delegation of a firm’s responsibilities, such as manufacturing and administrative tasks, to an outside third party. In recent years, the definition of outsourcing has expanded, and companies have increasingly utilized entities located overseas to meet their outsourcing needs.

Reasons for outsourcing: Outsourcing enables individuals and companies to delegate repetitive or unfamiliar tasks so they can concentrate on their core business. It also enables them to access labor sources, resources, technology and ideas they would not normally have access to. This process can greatly aid in specialization and efficiency as well as allowing work to be performed in the most cost-efficient manner and at the most suitable location.

For example, high-technology production is concentrated in places like the Silicon Valley where the appropriate people, technology and infrastructure have been established. Likewise, textile manufacturing is concentrated in areas of China where suitable conditions make these areas ideal for textile production.

By allowing individuals, companies and countries to concentrate and specialize on what they do best, outsourcing can be a win-win situation.

The challenges of outsourcing overseas: There are many advantages to outsourcing manufacturing overseas, however, it can also result in various challenges. While a nation may offer the best labor force and resources to produce a particular product, differences in culture, business practices and quality standards create obstacles. At Manufacturing Sourcing, we provide the expertise and resources to ensure a smooth, seamless process when companies outsource the manufacture of their goods. Products are manufactured at efficient, effective factories with excellent quality control. Furthermore, our clients do not encounter language and cultural issues since these are handled by our qualified staff.

Currency fluctuation and outsourcing: Currency fluctuation is another factor in overseas outsourcing. Increases or decreases of a country’s currency will increase or decrease its purchasing power. Since our pricing is almost always set in US dollars or currencies pegged to the US dollar, fluctuations in currency values will not immediately affect those who purchase in US dollars or those whose national currency tracks closely to the US dollar. However, those who do not purchase in US dollars may see the amount they pay fluctuate depending on the value of their country’s currency vs. the US dollar.

Lean manufacturing: Lean manufacturing is a philosophy of production that emphasizes efficiency and strives to eliminate waste from the manufacturing process while improving quality. This is done by continuously looking for ways to reduce inventories and the amount of labor and resources required to produce a product. Lean manufacturing originated in the Toyota Production System and in recent years, the practice of lean manufacturing has spread across the globe. Lean manufacturing principles are utilized in the manufacturing facilities selected by Manufacturing Sourcing to produce your products. Lean manufacturing practices will assist you in obtaining better products at lower prices.

Outsourcing will continue to expand as modern communication and transportation systems shrink the world we live in and business becomes increasingly competitive. Outsourcing will provide your business with additional opportunities to grow and prosper.

How to Compute Customs Tariffs

Tue, 28 Jul 2009 07:18:46 +0000

Please follow the procedure below to obtain an estimate of the tariff on your product if you are importing into the US. This is only a guideline. You will need to contact U.S. Customs to obtain an exact rate. For countries other than the U.S., please check the links at the bottom of this page.

1. You will first need to obtain a tariff number. You may be able to obtain it by going directly to the HTS Schedule in step four below,
but it will probably be easier to first go to the Customs Ruling Online Search System (CROSS) at customs rulings.

2. Go to the keyword search and type in the name of the product for which you would like to obtain a tariff.

3. A ruling number and a tariff number will appear. Click on the tariff number to get a tariff rate (usually from the previous year). If you are not exactly sure which tariff number is correct, use your best judgment. Obtaining an approximate number will be adequate for the next step.

For example, if you are looking for the rate on silk ties, you will get the tariff number 6215.10.0025.

4. Go to HTS Schedule to see the Harmonized Tariff and Schedule (HTS) of the United States by Chapter. Use the tariff number you found in step three to find the current tariff rate (i.e. the first two numbers of the tariff number you obtained in step three correspond to the chapter number you need to click on). Since there is the possibility you did not get the exact number, make sure the description to the right of the number matches the product for which you would like to obtain a tariff.

For example, if you are looking for the rate on silk ties, click on Chapter 62 (the chapter number is the same as the first two digits of the tariff number). Following the Heading/Subheading column to 6215.10.0025 will give you the tariff rate of 7.2% for countries with normal MFN status.

Links for customs offices in various countries.
USA: US Customs & Border Protection
Canada: Canada Border Services Agency
EU: The European Union’s TARIC database
United Kingdom: HM Revenue & Customs
Ireland: Tax and Duty Type
Australia: Australian Customs Service
New Zealand: New Zealand Customs Service
Worldwide: World Customs Organizations