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Why we left our factories in China - Essay Example

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Economic Theories from the Article “Why we left our factories in China?”

1. 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. …
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Why we left our factories in China

Download file to see previous pages... 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 ...Download file to see next pagesRead More
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