With global inflation impacting economies worldwide and logistics and freight costs reaching unprecedented levels, many are reconsidering offshoring and supply chain strategies, especially in China. Key questions are arising:
Is offshoring still a viable option?
Is it worth the investment?
What factors should I weigh before sourcing products outside Australia ?
To address these questions effectively, it’s essential to examine the specific costs associated with the products you are considering, including the quantities you plan to order. This analysis is vital before finalizing any purchases. There are two primary cost categories to evaluate: Tangible and Intangible costs, discussed in detail below, along with the critical factors to consider for each before making an offshoring decision.
Tangible Costs
When comparing the costs of importing goods to sourcing from domestic suppliers, it’s useful to obtain a Free In Store (FIS) quote. This quote represents the total cost for goods delivered to your warehouse.
An FIS quote for imported items typically includes:
FOB (Free On Board) price
Insurance and freight charges
Applicable tariffs
Customs clearance fees
Domestic shipping costs from the port to your warehouse
To accurately estimate an FIS quote, consider the following:
Freight: Look up transportation costs online and assess:
Whether to use sea freight or air freight
The size of the container: 40’ standard, 20’, or less than container load (LCL)
The number of items that fit in the container
Transportation to your warehouse:
Evaluate:
Proximity of your warehouse to the seaport
Size of the container being used
Tariffs:
Identify the HTS (Harmonized Tariff Schedule) code for your product
Determine the applicable tariff percentage
Understand the expected duration of the tariff
Intangible Costs
While tangible costs can be quantified, intangible costs are inherently more challenging to assess. Here are some examples of intangible costs associated with sourcing from China:
Supply Chain Responsiveness: Managing your supply chain can be more complex when dealing with a factory in China compared to local suppliers.
Obsolescence and Trading Position: There is a risk that ordered goods may become unnecessary by the time they arrive due to market changes.
Funding: Purchasing from China often involves upfront inventory costs, while Australian suppliers may offer more favorable payment terms, affecting cash flow.
Management from Afar: Travel and executive oversight represent intangible costs that can accumulate over time.
Product Liability Insurance: Some retailers may require this, and while Australian suppliers typically have it, insurance from Chinese suppliers may not provide the necessary coverage.
Recourse for Damaged Goods: If products arrive damaged, recourse can be limited, unlike with domestic purchases where payment may not have been made yet.
Order-to-Market Delays: Sourcing from overseas may necessitate placing orders months in advance, whereas local suppliers can fulfill orders much more quickly.
Transit Time: Delivery from international suppliers generally takes longer than from domestic sources.
“Made in China” vs. “Made in the Australia” Labels: The country of origin can affect consumer perceptions and market demand differently based on the product and sector.
In conclusion, the motivation behind sourcing from China often stems from the desire for cost savings that enhance competitiveness. Regardless of where your products are manufactured, it’s crucial to ensure you maintain that value advantage. This makes it essential to weigh the pros and cons of domestic sourcing against imports from China.
Purchasing from China should ideally be about 20% cheaper, but as a general guideline, aim for at least a 5% cost advantage (taking FIS costs into account). However, exceptions do exist, so don’t hesitate to contact us with any questions!