IN8

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International Perspectives By Michael Diliberto
I
T IS THE PACE OF RETAIL that attracted
me toand has kept me inthis busi-
ness for most of my career. With time
always of the essence, my colleagues and
I thrive in a world where decisions often
dont wait for analysis.
It is refreshing, therefore, when we have
the opportunity to make a decision born
not out of crisis, but from opportunity.
When we live in a world of rapid proto-
types, overnight installations, and expe-
dited logistics, we can be tempted to rush
judgment upon our international sourcing
decisions as well.
I was recently speaking to a colleague
about a sourcing opportunity that he was
considering, and I explained my logic
when it comes to these types of decisions:
I believe that sound financials have to be
relied upon to help guide many decisions
in business, and sourcing is no exception.
Overseas manufacturing is in vogue, but
in no way does that mean it is the right t
for every firm or every project. Unlike so
many of the decisions that we make every
day, sourcing decisions can and should take
more consideration.
WHY MANUFACTURE GOODS
OVERSEAS?
Lets talk about why. Tere are a lot of good
reasons. Some countries, by way of invest-
ment or natural selection, gravitate toward
particular areas of expertise, and as such
have moved from just being manufacturing
centers to becoming design centers of excel-
lence. Other times, we are looking to reduce
logistics costs by manufacturing closer
to our overseas customers. Most often,
however, what makes overseas sourcing
so appealing is the belief, whether real or
imagined, that we are getting a deal.
Recently there have been a lot of indus-
try pundits capitalizing on the reports of
phenomenal growth in real wages in China
and its effect on the manufacturing sec-
tor. While some companies may already
be refocusing their sourcing efforts into
the less developed nations of Asia, make
no mistake about it, there is still a world
of opportunity in more developed sourcing
markets.
DONT BE SEDUCED BY LOW UNIT COST
When analyzing the cost savings that can
be realized in overseas manufacturing, it
is easy to be seduced by the immediate sav-
ings that result from steeply reduced unit
costs. As with many economic decisions,
the situation is rarely that simple.
There are many other costs besides the
manufactured cost of your product that
need to be factored together to calculate a
true landed cost. Below I discuss a few of
the more common factors that should be
considered when deciding to manufacture
products overseas. As always, your mileage
may vary and youre well advised to consult
a professional before embarking on your
particular adventure.
FIND THE RIGHT SUPPLIER
One of the highest barriers to entry in
the global sourcing market is often find-
ing the right place to start. Anyone who
has attended the major retail trade shows
in the past few years has probably noticed
the increase in international presence on
the show oor. While this is a great oppor-
tunity for you to make contact with a large
group of overseas suppliers easily, it is just
the rst step in the long process of qualify-
ing a supplier.
I cannot overstate the value of perform-
ing as much research as possible before
you even think about stepping on a plane
to visit an overseas supplier. Te rst place
that I recommend starting, after A.R.E.s
website, of course, is that countrys branch
of the U.S Chamber of Commerce. The
Chamber can provide a wealth of informa-
tion on local business environments, and
in many countries they sponsor research
into the prevailing market conditions,
which is made available in various reports
and white papers.
But the most critical research that you
must do is within your own company
that is to say, for a given product, you must
know what your true cost is, before you can
make an informed outsourcing decision. If
your company has high xed overhead, you
will likely save less than if your costs are
highly variable. Knowing where you stand
is crucial to making the right choice.
Lastly, understand how your cash flow
will change in these new relationships.
Most suppliers will want payment up front
prior to shipmentanother cost that must
be factored into your total overhead.
PLAN FOR TRAVEL EXPENSES
Supplier relationships are complex, and
much like buying a car or shopping for
clothes, are often best handled in person.
First and foremost, exploratory trips are
a must, to get a feel for the environment
and meet potential suppliers.
When calculating the costs of manufac-
turing, at least a few supplier trips must
be budgeted into your overhead. At a mini-
mum, plan to be on site for the creation of
the rst prototype and for a week or so prior
to your products being packed for shipment,
so any last-minute issues can be corrected.
Included in this should be estimates for any
other services you may need. For example,
if the factory does not have their own QC
sta, you might be expected either to send
a representative from your company or to
hire the services of a third-party inspection
service provider to inspect and sign o your
goods prior to shipment.
SHIPPING CAN BE COMPLEX
In the world of retail, timelines are often
tight, and schedules do not flex easily
when grand opening or xture reset dates
are set months in advance. Just as inland
The Real Costs of Overseas Sourcing

The most critical
research that you
must do is within
your own company.

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truck freight sometimes adds weeks to our
domestic delivery plans, overseas logistics
can easily double that time, and must be
factored into your schedule. If this is your
rst time, I recommend working with a full-
service broker that can help you with the
specics of the products you are importing.
Harmonized codes, import duties, and
complex documentation requirements can
be a daunting task to take on, even for an
experienced logistics professional. Expect
that there will be minor hiccups, and if
possible, allow extra time to account for
logistics delays as you get your bearings.
Having to explain to a customer that the
fixtures for their new store opening are
stuck in customs is an uncomfortable con-
versation, to say the least.
AND NEVER, EVER,
ABANDON COMMON SENSE
In a faraway land, surrounded by strange
foods, strange drinks, and bizarre cus-
toms, its easy to be wooed by your suppli-
ers when they ask you to believe a situation
that dees logic and reason. Dont. Tere
are many reasons that the true gravity
of a situation may be obscured, from the
benign, like language barriers, to the more
nefarious, like lying to save face. Regardless
of the reason, your most important goal
must be to get to the bottom of the situa-
tion as soon as possible.
Years ago, I had the benet of an expe-
rienced Chinese business mentor, who
worked with me closely during my first
projects overseas. One of his most valuable
tactics was also the simplest: He always
had a profusion of questions for every sup-
plier. By treating every project as if it was
his first, we would often uncover issues
early on, rather than upon delivery. My
advice is that you should adopt a similar
set of tactics, ask lots of questions, com-
municate frequently, and never be afraid
to use Columbos tactic, and ask just one
more thing.
Mike Diliberto is gen-
eral manager, China, for
Bloomington, Minn.-based
Lynx Innovation Inc., an
A.R.E. member company.
Contact him at miked@lynxinnovation.com.
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