Overseas sourcing decisions – the total cost of sourcing from China

Abstract

Purpose

Although cost savings are found by many researchers to be a major reason for sourcing from China, the actual cost savings may not be as great as expected. This paper aims at studying and comparing the true cost of sourcing from China and companies' perceptions of the total cost of their China sourcing projects.

Design/methodology/approach

This research comprises six case studies and a mailed survey to 201 UK manufacturers with the experience of global sourcing from China. Comparisons of the findings from the cases and the survey are made.

Findings

The findings provide a comprehensive analysis of the total costs of outsourcing from China. Additional costs (additional to the quoted price), found from in‐depth case studies, averaged 50 per cent of the quoted price. The perception of additional costs, found from a survey, averaged 25 per cent of the quoted price. Taken together, these findings suggest that companies generally do not comprehensively measure the costs of global sourcing, and significantly underestimate the true costs incurred.

Practical implications

This has implications for decision making and ultimately profitability, and the paper suggests that more attention is paid to measuring the actual total acquisition costs. It confirms the benefit of a comprehensive cost framework, as a checklist that will prompt companies to think about all the possible sources of cost when sourcing globally. This should both guide their decision making, and also act to identify possible cost reduction activities.

Originality/value

This research is the first effort to establish the total cost of sourcing from China and to compare this with companies' perceptions of the cost of such sourcing. It is valuable in providing increased understanding of the sources and magnitudes of the costs of sourcing from China.

Citation

Platts, K.W. and Song, N. (2010), "Overseas sourcing decisions – the total cost of sourcing from China", Supply Chain Management, Vol. 15 No. 4, pp. 320-331. https://doi.org/10.1108/13598541011054689