By Jack Stack
If you haven’t been paying attention to the news lately, you might have missed some interesting developments: the Chinese government has started allowing the value of its currency to fluctuate, and Chinese workers have begun striking in efforts to increase their wages. Both of those developments are likely to increase the cost of manufacturing in China, and here’s another newsflash: the costs of shipping containers are also going up. Fast.
Steve Crowder, the president of GuildMaster, an SRC affiliate that manufacturers and sells accent furniture, told me that the costs of overseas shipping containers have increased by 30 percent since the beginning of May — increasing from $4,000 a container to $5,200. And that doesn’t fully account for the fuel surcharges that logistics and shipping companies have begun tacking on to take advantage of all the goods needed for an expected surge in demand for the upcoming holiday shopping season. The reason I point out these stories is that I’m seeing an emerging trend: the increasing cost of doing business in China.
The upside of such a trend, of course, is that more and more companies like GuildMaster are taking a second look at United States manufacturers, something that’s being called “near-sourcing.”
Personally, I’ve always seen off-shore manufacturing as a significant risk to a company’s cash flow, something not enough people pay attention to. It used to be cheap and easy to borrow the money to finance off-shore manufacturing, but that’s changed. Consider this example: Let’s say you want to order a batch of widgets from a manufacturer in China that’s charging 50 percent less than a manufacturer here in the United States. The price may be good, but you have to wire the money up front to pay for your order. Then you wait — up to 90 days while your product is produced and shipped across the ocean.
When you finally get the product to your customer — let’s say it’s a big-box retailer — you then have to wait up to 90 days before you get your money. Think about that. The time between when you lay out your money to your manufacturer and when you finally receive a payment from your customer can be as long as 180 days. So, you might wait up to 225 days before you get your money back. That’s a long time and a serious drain on cash flow. And that’s assuming everything goes well. It’s also possible that your product won’t sell and your big-box client will return it. If that happens, you’re stuck holding more inventory and waiting to get paid for it, possibly until the following season.
But let’s look at this scenario from a different angle. Suppose you choose to hire a domestic manufacturer instead of one in China. Now, rather than paying up front, you may well be able to negotiate terms where you pay your supplier 60 days after you receive your product — which amounts to a 60-day, interest-free loan. Ideally, you end up paying your supplier at just about the same time you receive your payment from your customer.
The shorter supply chain also comes into play in a big way if you run into a quality problem or a shipping delay or if you have the happy problem of needing more product to meet customer demand. Several big-box retailers will penalize you if they sell out of your product and you can’t resupply them immediately — what’s known as a “stockout.”
When you source your product from China, and need to wait up to 90 days for each order, you have to carry extra inventory as stock-out protection — another big hit to your cash flow. When you use a domestic supplier, you can turn to FedEx or UPS to solve your problem overnight. That means you don’t have to carry as much extra inventory.
With a long supply chain, an entrepreneur faces tough choices because the company’s cash is tied up with suppliers and customers. With credit still tight, companies can end up struggling to cover the inevitable cash shortfalls that come from growth. Some companies resort to doing things like factoring — borrowing off their accounts receivable at interest rates that can top 20 percent — or bringing in outside investors and private equity money, decisions that cut into either net income or equity.
Then there are companies like Springfield Spring in Springfield, Mass., an open-book company founded in 1942 that makes precision-engineered springs and clips. Norman Rodrigues, the company’s chief executive, says that domestic small businesses have long underestimated the true cost of manufacturing overseas, but he believes those costs are now becoming clearer.
“Six years ago, everyone was falling over themselves to get into China to save money and maximize what they called their ‘shareholder value,’” Mr. Rodrigues told me. “But, when you begin to add up the cost of freight, the aggravation of delays, the lack of quality control, and the money you need to invest relative to cash flow, you’re starting to see people in the boardrooms of the big corporations reconsider that decision.”
Of course, we don’t have the same manufacturing base here that we used to. And, for certain products, off-shoring might still make sense. But, given the advantages that a domestic manufacturer can give its customers, like just-in-time delivery and better quality controls, maybe we’ll see more opportunities for new businesses to take root in the United States in the near future.
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