Many UK manufacturers have transferred their production to low-cost regions to reduce costs. But a new study has discovered that these savings are not as substantial as they first seemed.
Many UK manufacturers have transferred their production to low-cost regions to reduce costs. But a new study has discovered that these savings are not as substantial as they first seemed.
companies tended to underestimate the non-price costs of sourcing from China by about 30%, often underestimating costs for extra warehousing to cope with variable demand
Cheap labour has been an incentive for manufacturers to outsource their production abroad, but there are many uncertainties and risks involved in having a distance between the host location and the outsourcer. These uncertainties and risks can lead to unexpected costs – for example, rising oil prices affect shipping costs – which can offset any gains made from cheap labour or, in some cases, result in losses to the outsourcer. A recent study by Drs Ken Platts and Ninghua Song of the Centre for Strategy and Performance in the Institute for Manufacturing has investigated the real costs involved in sourcing from China.
To arrive at a complete picture of all the potential costs, they developed a total-cost model covering 15 items of set-up cost and 36 items of ongoing cost. The model was then applied, using in-depth case studies, to nine products sourced from China. They found that the quoted price, on average, accounted for only 65% of the total cost incurred, but there was high variability from product to product. In the worst case they investigated, the total cost was almost four times the quoted price.
The case-study research was followed by a survey into companies’ perceptions of China sourcing costs. This, taken with the case studies, suggested that companies tended to underestimate the non-price costs of sourcing from China by about 30%, often underestimating costs for extra warehousing to cope with variable demand, and inspection to cope with variable quality.
The cost data were collected during 2006/7, before the recent oil price explosion, so we might expect that, as transportation costs increase, the ratio of total cost to quoted price will also increase.
For more information, please contact Dr Ken Platts (kwp@eng.cam.ac.uk)
or Dr Ninghua Song (ns359@cam.ac.uk).
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