Q: Where does upstream costing fit into the process of outsourcing production of your branded products?

A: Factories that we buy finished products from are usually only assembly plants. The components inside the product come from a multitude of suppliers. The design, IC chips, components, accessories, instruction manual, and packaging all from separate sub-suppliers.

Good sourcing agents know which components are being used in a product and know the product’s material cost. What varies from factory to factory is the price of assembly, known in Chinese as "jia gong fei", or labor cost. The labor fee is where the overhead costs, intangible costs and profit are all compounded.

The first step to smart sourcing is to know the cost drivers of the product you are buying. Learning the costs of the major components (display, IC chip, wireless module, biometric reader, etc.) is the right place to start. To find out these costs contact the sub-suppliers directly and ask. Not only can these sub-suppliers reveal the market price for the components, they can often give insight into who are the most reliable and quality-conscious manufacturers to buy the finished product from. Once a buyer has a basic idea of the component costs, it is easy to calculate how much a particular factory has added as labor fee.

When two factories are selling an almost identical product for a different cost the question is, why is one labor fee higher than the other? Then the challenge becomes determining how the labor cost is being allocated, and there are two likely scenarios for this. The first is that the factory is investing in their employees (training, management, benefits, salaries, etc.) and factory infrastructure (machinery, maintenance, environmental controls, etc.). The second scenario is that they are simply taking a higher profit margin. A quick visit to the factory, and sitting down face to face with the factory owner to gauge their values and personality type, will often reveal the answer to this last question.

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Readers have left 2 comments.

 1. Untitled
Guest User, Unregistered

thankyou

 Posted 2008-01-19 23:17:23

 2. Director of Operations - Asia
Guest User, Unregistered

Great suggestions.

 Posted 2008-01-29 00:28:34

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