There are no escaping global trade tensions in the world now. The constant threats and shifting rates have left our clients lost about what to do next.
Previous blogs focused on the high-level hypothetical concerns for companies that manufacturer in China. This blog will focus on a real-world example of the difficult decisions our clients are forced to make.
The Situation
One of our oldest clients wants to move manufacturing out of China to a contract manufacturer in North America. This client produces metal products with very high specifications and tolerances. The client has used the same contract manufacturer in China since before COVID. However, the contract manufacturer was not always able to deliver on time nor was it able to always produce to the correct quality.
These shortfalls, tariffs, and geopolitical tensions convinced the client that they needed to leave China and reshore operations in North America. The client was not ready to manufacture the product themselves so needed to a contract manufacturer.
MTG assisted the client in finding a contract manufacturer that would take the smaller MOQ and could meet the exacting requirements of its products. The manufacturer agreed to take the existing molds from China and made a few changes to the design to streamline the manufacturing process.
There was a catch. The price per unit was much higher. With tariffs, the price from China was about $45 per unit. The North American price was $85 per unit. The client had to decide which option was a better choice.
Option 1: Stay in China
Staying in China is the safe option. The per unit price is lower even with tariffs. The client knew its current manufacturer and the entire process was well-established. It is the path of least resistance.
On the other hand, the contract manufacturer still had quality control issues that required returning products on a regular basis before they could get into the hands of clients. The contract manufacturer also was chronically late with its shipments. The client had to either stockpile product or reduce its selling activities so it could better control supply.
Option 2: Move to North America
Moving to North America is a difficult and expensive process. The client will need to ship the molds from China to North America. New systems, new prototypes, and new relationships. The per unit cost will be nearly double.
Yet, there are a number of advantages. The manufacturer is in the same time zone, speaks the same language, and is more transparent than the Chinese contract manufacturer. Our client, after MTG’s vetting process, was confident in the supplier’s manufacturing skill and its ability to produce to the quality specifications and on time.
Which Option is Best?
The choice is not obvious. The price difference between the two products is considerable and will have a huge effect on the client’s margin. Its demand is fairly inelastic so raising prices by the same amount is not possible.
Yet reliability and consistency are extremely valuable to any company, especially ones that have a demanding niche market. Knowing that supply can meet demand and that whatever is sent to the end customer will be correct is worth a lot. Settling for lower margins but higher sales and fewer headaches can be worthwhile.
What would you decide to do in this situation?
What can MTG do to help you improve your operations?
