It should go without saying that international manufacturing product costs are key for nearly all companies that manufacture in or secure their products from a foreign country. Most companies that manufacture in China would love to move their manufacturing out of China. But doing so is difficult for nearly all, and impossible for many. Product manufacturing costs are a huge factor in choosing a location for product manufacturing or outsourcing.
Over the last year, I have had probably more conversations about where companies should manufacture their products than in the prior five years combined. And those conversations have reminded me that many companies have too narrow a definition of product costs.
1. How to define international manufacturing product costs
Long ago, when China manufacturing was just taking off, a company called me about having their books produced in China. During our discussion I learned that they would save five cents a book by moving their outsourced production from Jordan (yes, I know that is unusual) to China. I also learned that they had been using the same book producer in Jordan for 16 years and thought very highly of them.
I strongly suggested that they not move their production, based on the following:
1. They should expect one out of every four books from China to be unusable at the beginning of their relationship and for costly problems to remain even after those numbers decrease.
2. They should factor in the risk of the Chinese company taking a large payment and then just disappearing. See On the IMMEDIATE Importance of China Manufacturer Due Diligence. This could happen with the Jordanian company as well, but is a lot less likely.
3. Chinese factories have an annoying and incredibly frequent tendency to lure in product buyers with really good costs and then randomly increase those costs once everything is running smoothly as between them and their product buyer. See How to Lock in Product Prices with Overseas Manufacturers.
4. Chinese factories have an annoying and incredibly frequent tendency to lure in product buyers with really good costs, but with no intention of ever making a single widget for them. They do this to learn about their business and then steal their IP and/or their customers. Not moving forward with a factory without first requiring they sign an NNN Agreement or a Manufacturing Agreement that will prevent that can provide you with protection against this. If the Chinese factory refuses to sign these, you know their goal is to steal your IP and/or your customers. But, it costs money to have an international manufacturing lawyer draft even a contract that never gets signed.
5. They should compare their shipping costs for getting their books from China as opposed to from Jordan.
And note that this discussion about international manufacturing product costs was well before companies needed to contend with such post-COVID issues as China factory shutdowns due to COVID or due to energy shortages or the China tariffs or the United States Government blocking products from China due to its abysmal human rights. The point is that there is a lot more to international manufacturing product costs than the price your overseas factory charges to make your product.
2.Cost determiners beyond the factory price
If you are considering where to have your product made, the below are some of what you should consider in making your determinations:
1. Invoice price. If factory is quoting an FOB cost, the invoice price includes only the product cost itself and none of the costs below.
2. Shipping Costs. Sea is usually cheaper and slower than air. Transportation from Mexico to the United States or from Poland to Germany will be considerably less than from China to the United States or Germany. The environmental impact will also be considerably less as well. See Moving Manufacturing from China to Mexico or Poland Will Help the World.
3. Delivery. It is important you know what your last leg costs will be. If your product will be trucked from Mexico to your warehouse in Peoria, your costings will be very different than getting product sent from Inner Mongolia to a port in Tianjin and then from Tianjin to the port in Long Beach and then from Long Beach by truck to Peoria. Particularly with sea freight, delivery from the port of entry to your final destination is an often overlooked cost.
4. Import Taxes (Duties) Depending on the type of product and the country from which it is coming, duties can add significantly to your landed cost. I am often surprised at how often companies do not account for the roughly 25% tariff imposed on nearly all goods from China coming into the United States.
5. Insurance. Generally, the riskier the country and the more “touches” required to get your product from your factory to its destination, the higher the insurance costs.
6. Handling. Ports and other parties that “touch” your cargo often charge a handling or processing fee. The more touches, the more handling fees.
7. Banking Fees. Wire fees, letter of credit fees, etc.
8. Commissions. Trading companies or other intermediaries may charge a flat fee or a percentage.
9. Political, Legal, Supply Chain, Weather, Inflation, Stability, and IP risks. Countries that are risky for at least some of these things are more likely to cause you product disruptions (and thereby increase your product costs) than those that are not. Paying one dollar for your widgets from a stable country with a good legal system like Portugal will almost certainly end up costing you less in the long run than paying a dollar for your widgets from Afghanistan. See Has Sourcing Product From China Become TOO Risky?