Setting Up Local Production in China — Factories Within Factories

For companies that are not ready to set up their own factory operations in China or other developing markets, it can make sense to partner with local companies that specialize in setting up "factories within factories." A recent article in Supply and Demand Chain Executive shows why. The above-linked story describes the case of a medical products company that despite the IP risks -- some medical device companies that I have spoken with still consider China too risky from an IP perspective -- decided to set up production in China by partnering with a local company specializing in these services, such as "cut-and-sew" soft goods production. Before embarking on the effort, the company "had neither the knowledge nor the resources to begin the process of single-handedly establishing a solid manufacturing base in China."

Despite these limitations, they were able to find a partner to offer a "factory-within-a-factory" approach that provided what amounted to "a low-risk, quick and cost-effective way to essentially incubate its own manufacturing operation ... [while navigating] China's complicated business and legal landscape" and putting "the wheels in motion to eventually own operation in the region." In many companies today, divisional or corporate VPs of Operations or Manufacturing make many of the decisions from an operational standpoint in these sorts of arrangements. Those which fail to involve procurement, however, are most certainly leaving money on the table. For example, it's unlikely that the organization in the case I just referenced received complete line-item cost break-downs from their partner -- who was most likely operating on either a fixed fee or cost-plus basis -- to see if they were getting a good deal on raw materials or other inputs (or operating overhead).

In any type of overseas manufacturing operation like this, or joint ventures with local partners, procurement organizations should act as a watch-dog that not only alerts its owners about potential expenses, but wards off any intruders (or gougers) by playing a bad-cop role in negotiations and ongoing auditing and cost monitoring. Procurement organizations should also insure that they have full visibility into spending on the local level -- especially in China, given the IP risk involved and the fact that piracy is not considered taboo in the same way it is in the West -- so that a "third shift" does not inadvertently eat up inventory unknowingly (not to mention producing counterfeit items). After all, eternal spend vigilance is the price of sourcing liberty -- especially in developing markets!

- Jason Busch

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