US small and medium-sized enterprises (SMEs) frequently view the prospect of obtaining raw or finished materials or goods from countries as far away and culturally different as China as challenging if not impossible. Though large, multinational corporations often have substantial resources and numerous overseas offices to support global sourcing operations, smaller companies with limited resources may believe they have no choice but to stay closer to home. But sourcing in China offers foreign companies of all sizes ever-increasing opportunities to acquire high-quality, low-priced products.

The popularity of China as a location of export processing facilities and a source for both components and finished goods bound for overseas markets is well known. According to the PRC's General Administration of Customs, China's exports reached an impressive $325.6 billion in 2002—a 22.3 percent increase over 2001. So while sourcing in China may seem logistically overwhelming to a smaller company, the cost savings and other benefits warrant a closer look.

Sourcing considerations

The first step for a company looking at China's sourcing opportunities is to consider the market conditions in the United States. Then the company must look at the demands of the China market.

• Retailers demand more
  Smaller manufacturing companies now face more stringent demands from their customers. In the past, for example, a small manufacturer may have shipped one truckload of goods at a time to a large retailer. Today, the retailer's needs are far more complicated—sometimes it requires a mixture of products on the same pallet. The retailer will tell the company exactly what it needs rather than working within the company's constraints. This can be a huge burden on a small manufacturer, which will need to perform many more services, such as labeling and shrink-wrapping, that raise the product's cost. SMEs also face new requirements from larger retailers that want to minimize the amount of time their employees spend receiving products and processing inventory. They continue to push toward a simple system of scanning to get the items into inventory.

• The China learning curve
  Many American SMEs are minimally staffed and lack expertise not only in importing from China but also in advanced supply chain management.

The complexities of ocean freight provide a good example. Ira Albucher, director of logistics for ThreeSixty Sourcing, explained that ocean container rates recently rose by roughly $1,200 per container. Small companies face huge price increases and no way to reduce them. Larger companies that import mass quantities of containers often have direct contracts with steamship lines and can mitigate some price increases. Ocean freight rates vary widely—nearly every space on a container ship has a different price that is potentially negotiable. Companies that lack expertise in importing can have a difficult time obtaining and negotiating competitive freight rates.

Though freight forwarders offer excellent service and expertise, customers could do better by using global sourcing service providers that buy ocean freight services cheaply in bulk and then pass on savings to their customers. To obtain the best prices, sourcing companies first assess an importer's freight needs and then interview qualified service providers and ocean freight carriers, ultimately selecting the best combination of service and price.

• Security issues
  Protecting intellectual property (IP) is an area of concern when moving production into China. IP protection begins with the proper identification and evaluation of qualified suppliers. Companies must perform thorough due diligence on their selected suppliers, with constant inspections of products and facilities. Thorough IP protection requires specialized services and the advice of qualified attorneys or organizations that specialize in this area of law.

Another security issue is the joint government/business initiative to improve cargo and supply chain security. Earlier this year the US Customs Service introduced strict requirements for anyone associated with importing goods into the United States. The Customs-Trade Partnership Against Terrorism (C-TPAT) is an initiative to increase cargo and supply chain security while improving trade flow. Under this program, businesses must conduct comprehensive self-assessments of their supply chains using the security guidelines developed jointly with US Customs.

• Short-term scares vs. long-term savings
  The outbreak of severe acute respiratory syndrome in Asia this spring temporarily discouraged US-based companies from sending employees overseas for product development, supplier evaluation, and selection. Despite this and other potential short-term risks, the costs of sourcing and producing in China are likely to remain low in the long term.

Advantages of sourcing in China

The advantages of sourcing in China have begun to outweigh the risks.

• Rising quality, falling demand for brand names
  Many retailers are growing less dependent on brand names in part because they, and their suppliers, demand—and receive—good value from Chinese suppliers. When two products are equal in specifications and one is significantly cheaper, a retailer can provide great value to the end customer by choosing the less-expensive product—as long as the customer does not demand a brand name. Many large, well-known Western retailers are thus no longer willing to pay premiums for brand-name products when they can get products of equivalent quality for less money.

Indeed, these large retailers, which buy many consumer goods from China, are responsible for having raised the bar for Chinese suppliers. In some cases, such as in the sporting goods industry, Chinese suppliers are developing and marketing their own brands, which have become quite attractive to large, US-based retailers.

• Better service
  China's low product and labor costs are well known; its advantages in services are often underestimated. Today, when a small or medium-sized importer needs labor-intensive, value-added services, Chinese suppliers and logistics service providers are capable of responding. Applying labels or mixing products on a pallet can be extremely time-consuming and labor intensive. Since Chinese labor costs a fraction of US labor, it is worth examining whether a particular service can be performed in China.

Supply chain management and overhead costs are also lower in China, and the education levels and expertise of personnel in logistics services are increasing rapidly.

The role of technology

Until recently, many Chinese suppliers used outdated technology. Even a few years ago, most communication, from sending requests for quotation to issuing purchase orders and confirmations, took place by fax. In the last few years, e-mail has dramatically improved communication and many China-based suppliers have established online ordering or enterprise resource planning systems that can link up with the systems of their customers.

Nevertheless, managing numerous customers and thousands of stock-keeping units by fax or e-mail is inefficient, and importers and suppliers need state-of-the-art systems to achieve the best results. ThreeSixty Sourcing works with customers to establish Internet-based planning systems that permit these customers to access all phases of the planning and production cycle over a secure Internet connection. These customers can then view their order and shipment status or project tracking information any time of day from anywhere in the world.

China's new factories, high-tech offices, and production lines enable Chinese suppliers to crank out any orders placed in front of them at the right time—and at the right price and quality, says ThreeSixty's Albucher. And supporting infrastructure such as highways and deep-water ports is also improving. Goods used to linger in Chinese ports for weeks; ships now sail five days a week, Albucher adds.

WTO opens doors

China's World Trade Organization (WTO) entry has been providing greater market access and trading rights for foreign companies in China, if slowly. Such openings are prompting companies in a wider range of industries to reevaluate the Chinese sourcing model. One example is the luggage industry. High-quality nylon luggage products that used to be made in the Philippines and Thailand are now produced in China.

With lower costs for products and labor in China and an ever-growing selection of more sophisticated logistics services, American SMEs may find that the time is right to explore sourcing in China. In fact, they may find they cannot afford to pass up the opportunity.