Sourcing from China

[Supply Chain Novice]

We are looking into the possibility of sourcing product out of China, but are concerned about the risks and increase in lead times this might cause against our estimates in cost benefits, any advice from anyone who has successfully sourced from China and what best practices they would recommend for a novice?

[TopLink]

SCN,

What part of the World are you in? Guess the experience may differ, particularly in terms of lead time.

[Simple]

Originally Posted by Supply Chain Novice

We are looking into the possibility of sourcing product out of China, but are concerned about the risks and increase in lead times this might cause against our estimates in cost benefits, any advice from anyone who has successfully sourced from China and what best practices they would recommend for a novice?

Textbook advice of using 2 suppliers (one existing and the other the new one) is worth considering.

[logistic boy]

Originally Posted by Simple

Textbook advice of using 2 suppliers (one existing and the other the new one) is worth considering.

Works well for me, every time.

[Mood]

I recently had a conversation on this topic with some other supply chain people. One of them had outsourced their manufacturing to SE Asia and in doing so had considered the GMROI (Gross Margin Return on Inventory) number for his business. This is also known as the "Turn & Earn Index". Its a rough profitability measure that tells you how hard your inventory is working for you; I understand it's commonly used in the retail sector.

It works like this:

Business profitability is determined by many factors. One critical trade off is the margin earnt by a SKU and how often that SKU turns over. An antique dealer traditionally has very low stock turns so needs high margin products to be profitable. In contrast a grocery retailer has very fast stock turnover and can be profitable with low product margins.

The Gross Margin Return on Inventory Investment [GMROI] represents the amount of gross profit or margin earnt for every dollar of average inventory investment. It is a measure of gross profitability of an item, line, category or total business. It identifies areas of stock that are not covering their costs. Where the margin can’t be increased then need to reduce inventory to ensure item at least pays for itself

GMROI is calculated as - Gross Margin (as % of Sales) X average inventory turns = GMROI
It can be calculated at a business, product family or item level. If the result is greater than 100 then it is contributing favourably to profitability and to offsetting the indirect costs of the business. So if it's a lot more than 100 great. If it's less than 100 then chances are that product is eroding profitability.

In the latter case you need to either improve your margin or reduce your inventory!

So, what happens when you increase the length of your supply chain? Most businesses go to international sourcing to reduce their costs (COGS) so they will see an increase in their margin as a result, all other things being equal. But extending the supply chain will inevitably increase your inventory. To maintain the same GMROI then, there is a finite increase in inventory that can be supported before you start to erode profitability.

Try this example:

If your current GMROI is 200 i.e 40% GM X 5 turns, and you were to get a 10% improvement in GM by moving offshore then how much more inventory could you stand to have before your profitability started to slide?
So, redoing the calculation 50% X 4 = 200. We could stand for turns to go from 5 down to 4. To see the effect of this convert the turns figure to days of inventory and see how many days of extra inventory you could hold for the same GMROI. If the extra inventory is less than the pipeline fill for the offshore sourcing then you WILL erode profitability!!

Try it for the numbers in your business.

[Homer]

Sounds like a logical argument. Need to run some numbers on a whiteboard I think!

[SCM]

Homer.

Let us know your thoughts once you run the numbers please.

[ChinaLilyZhu]

Originally Posted by Supply Chain Novice

We are looking into the possibility of sourcing product out of China, but are concerned about the risks and increase in lead times this might cause against our estimates in cost benefits, any advice from anyone who has successfully sourced from China and what best practices they would recommend for a novice?

Good question.

The lead time sourcing directly from China isn’t that significantly different sourcing locally in the States. It all depends on whom you are working with. It takes a US manufacturer two month to finish a container of pocket tissue, and have truck arranged to deliver to the destination. It can also take a Chinese supplier 2 weeks to finish the whole production, and use another 1 month to deliver by ocean and local trucking to you. So lead time is not a problem, the working with whom is the problem. Chinese suppliers are usually more responsive than their US peers, that’s how I feel, but it has to be communicated in the right way.

Try using 2 suppliers (one existing and the other, Chinese) is worth considering.

As well, the overseas shipping cost shouldn’t be considered another factor against the cost benefits. For instance, one shipment from China had cost me $850 from factory to a Chinese port, and then to New Jersey CFS. However, local trucking within New York costs me the same amount for 75 miles. Can you believe that?

Sourcing in China may extend supply chain, but it is lowering your general inventory as it’s outsourced. The instant saving deserves really SERIOUS consideration. My old two cents.