Speaker: Oscar Jones, W. L. Gore

Topic: “To China and Back Again”

In a decade where outsourcing to China has become one of the chief mechanisms for reducing cost, we learned that reaping the benefits from inexpensive labor is more complex than looking at cost of goods sold (COGS).

Oscar walked us through the three phases of a manufacturing plan to move production from the US to China. Each phase of the project had its own set of challenges that required completion before moving on to the next phase. The goal of phase one was source raw material in China; of phase two, to move packaging to China; and of phase three, to move production to China.

The benefits of sourcing from China can include a lower raw material cost, flexible raw material supply, cheaper labor, and regional manufacturing for a global business. Oscar used local Chinese Associates to help identify potential suppliers and contract manufacturers to zero in on the best ones for his product line. After successfully driving the project through phase two, it became apparent that there were additional aspects of the transition that would need to be considered in addition to COGS. First and foremost it was discovered that their customer base was concerned that the product was packaged in China, and this in turn affected sales. Even though the product was still being made in the US, the customer noticed it was being packaged in China because it had to be declared on the box (packaged in China). This was a negative experience for the customer, impacting their purchasing habits. Secondly, the legal aspects of moving material in and out of the country (particularly in phase two) proved more problematic than anticipated. When asked what Oscar would do differently if he had to start all over again, he did not hesitate to answer that he would get Legal and Logistics from both countries involved from the very beginning.

Lastly, the packing operation, while effective, was not as efficient as Gore’s US counterpart’s. This affected their ability to manage material through the supply chain with the lead-times that they had anticipated. While this could have been improved if they continued with their plan, the decision was made to keep the operation in the US because the team could not afford to risk losing customers due to the “Packaged in China” label. In the end Oscar and the team negotiated a 10% decrease from their domestic packaging contract manufacturer.

There are real benefits that can come from setting up operations overseas, but there is more to consider than cost of goods sold.