Economic Theories - Why We Left our Factories in China by Sheridan Prasso - Article Example

? Economic Theories from the Article “Why we left our factories in China Cost minimisation The economic concept that compelled business that includes Sleek Audio to outsource its production be it in China, India or elsewhere is the imperative of cost minimisation. Businesses are compelled by competition to sell products at the lowest price possible at the highest quality doable. Such, businesses are always on the lookout for ways on how to cut cost and improve quality on the inputs of production. This effort to cut cost often points producers and businesses to outsource to China because of the cheap labour and material cost. In the article by Sheridan Prasso entitled “Why we left our factories in China”, Prasso pointed the numbers why manufacturers go to China. In 2005, Sleek Audio was quoted a price of $20 of $19 or $20 for one particular component that the Chinese were offering to make for $2 (2011). That is a whooping $17 to $18 price difference with each component. If Audio Sleek will purchase by the thousands, the price difference will just be very hard to ignore. 2. Economy of scale In the article of Prasso, businesses are now beginning to leave factories in China with the emerging movement called reshoring where business are beginning to bring their operations close to home. One of the major reasons cited for reshoring is that it is very difficult to deal with China; other is the presence of language barrier and delay in response time if there are any issues. Mark even lamented that when they are in China, great care are being extended to satisfy them where parts are made perfectly when they are around. The trouble is, when they give the go signal to make 10,000 to 20,000 pieces, problems begin to occur. The initial cost in going to China may be cheap that a business may be able to have cost savings by going to China. But it really is not that much because of the hidden costs, the delays, shipping cost and the cost associated with the learning curve. In effect, what has been initially saved was also defrayed by other incidental costs in going to China. This explains why many firms are moving back to the US or reshoring. The quotation cost in the US may have lowered from $20 to $19 to $8 because of the recent crisis. US workers are now more eager to work too because of the scarcity of the jobs. Still, there is a price difference between the new quotation of $8 and the old price of $19 to $20. But companies in the US can compensate for the price difference through economy of scale. Meaning, it can recover the lost profit of the price difference of the item by making more of the same. This is very probable because the initial experience of Sleek Audio when they decided to get back their operation in the US which won them the 2011 Best of Innovation award from the 2011 Consumer Electronics Association. It manifest that components that were made in the US were of excellent quality and that would encourage other businesses to reshore their operations back in the US. The effect on this to component maker would be an increase in volume and although they lowered their quotation to become competitive in terms of pricing, the foregone profit for the discounting the price can be recoup through volume. In economics, the amount of increment in terms of cost is not always constant with each volume added. This is especially true with manufacturing plants. To illustrate, let us use the above example. Let us say that the cost for making the component is $5 for 1,000 units which would cost the component maker $5,000 to manufacture a 1,000 unit of a particular part. If a certain client/s would order have an accumulated order for example of 100,000 units, it does not mean that each unit would still cost $5 to the component maker that would amount to $500,000. With that quantity, the cost may be brought down to $4 per unit or $3 to the component maker saving them $1 or $2 with each component which could cover the foregone profit of its former price of $8. This is because some cost in manufacturing the component does not change regardless of quantity or are called fixed costs. Manufacturing costs such as rent, depreciation, utilities expense do not change regardless of quantity. So if the quantity of orders increased, the proceeds of the added volume would add to profit. By capitalizing on the principle of economies of scale in a business, enterprises become more competitive by lowering their prices as well as more profitable by making money through quantity. 3. Value of efficiency and technology Chinese subcontractors lure their customer with their bottom rock pricing. Businesses in turn find it hard to refuse Chinese pricing because of the savings afforded by these Chinese subcontractors. To illustrate, Sleek Audio was quoted $19 to $20 before compared to $2 in China. The price difference would be very hard to ignore from a business perspective. Factories in China were able to do this because of its cheap labour and lax labour laws. In contrast, labour cost in the US is expensive with a stringent labour regulation. Unlike in China where factory supervisors can command their workers to overwork even during weekends that are not possible in the US because the workers are protected by law. This difference in price and treatment of workers has repercussion though. Although Chinese workers are cheap and prone to labour abuse, they are not exactly the best workers evident with the overruns and poor quality of their produce. It is because they do not have the technology in terms of machines and know how to do work efficiently at a high quality. In contrast, workers in the US may be expensive compared to China but they do quality work and have the technology in terms of machinery and literacy to get a job done efficiently and of higher quality. This was evident with the experience of Sleek Audio where the company won the 2011 Best of Innovation award just by reshoring to the US. Read More