Friday, March 16, 2012

Why Pay for Overruns?

A response to a customer regarding the option of buying overruns. Customer feels that he always get free overruns from others, why is it we are charging them for overs.


It is actually very customary to charge for overruns and discount for unders here in the U.S. and other places. You have the “option” of buying the overs at the same unit price if they are useful to you. When the overs is less than 1%, there is usually not a big deal in giving it away to customers. 1% on a standard job is really nothing; we do that all the time. But when an order has a very high qty count, even at 1% may represent a significant cost.

In normal circumstances, and when the overs are really low, we would really try to pry those from the factory and give them to the customer. But when we run a hairline margin on the order in question, and when the overs are high, the factory will not give them away.

The concept of overs and unders is an inherent part of manufacturing. Anything that’s customized, the factory will have to buy more material than what’s being ordered. This is normal as there are always some wastage during the manufacturing process. And you are absolutely right, the quoted price should have already included additional material to be sacrificed in projected wastage; this is very true. If everything goes as planned, or even if goes better than planned, we should have either exactly the qty ordered or a little bit overs. Your past experience may have been based on this scenario. But, in the event that the wastage is more than originally anticipated, then you’ll end up with unders – final qty will be less than what you ordered. In that case, factory will give discount based on the unit price. It is very fair, you pay for only what you get. And since the factory did more wastage than they should, they deserved to be punished for the money they could have earned if they had controlled their wastage.

In real practice, especially for customized manufacturing, there are unexpected wastage always taking place. A responsible factory will tend to buy more material, on his own dime, than whatever much the projected wastage was originally quoted to ensure that he has enough qty to deliver after everything is said and done. Because he anticipates if there should be more wastage on certain item than normal, he’ll still have enough to meet the qty. This is always the best practice. However, the down side is, if the wastage was normal, he’ll end up with more than what was ordered, hence, the overruns. Since he paid for these additional material on his own, he’ll want to recover the costs for this, especially if the overs are higher than 1%. This is reasonable.

In short, if we tell factory that we won’t buy any overs, then he’ll just buy enough material to cover the standard wastage. If everything goes well, great, we’ll have the qty we need. If not, we’ll get discounts for the shortage. So the promise to buy overs at “not to exceed” a certain percentage is really another form of insurance for the buyer to ensure that we get the qty that we need.

And one more point… A little bit of overs is fine. But when there are quite a bit, it creates additional shipping charges if they don’t fit the container just right.

The last thing I want is to create any misunderstanding between us. And I do not want you to see us as greedy bastards trying to make that additional 3% or 5% of overruns. That’s not what we are doing here. My loyalty is always on my customers’ side, not the factory. And I’m not going to get rich by selling overruns to customers. To me, this is a professional recommendation, not a way to make money.

I don’t want you to perceive this as a money making opportunity that we are creating for ourselves. This is really something to ensure the end result of manufacturing goes as good as planned.

Tuesday, February 28, 2012

Customs Corruption

As part of my work in overseas sourcing, I've had many calls to ship stuff to international destinations. My recent round of shipment that got stuck at some third-world country is especially worth mentioning. This doesn't happen for shipments originating from most western countries (i.e. the U.S.), but stuff like this happens quite often when the originating country is also another developing country, like China.

Before I go off criticizing other less-developed countries, I have to state that China, as itself is still classified as a developing country, fares no better when it comes to Customs corruption. However, the corruption is much more organized and well-planned rather than the small-time hoodlums you find at other less-developed countries. Personally, I believe corruptions go hand-in-hand with any government. And yes, even in the U.S. Here is how I classified the three different levels of Customs corruptions at different levels of development.

Developed Countries, like the U.S. Corruption is less but still exist. Corruption is there but is well-disguised. A very systematic and organized methodology have already been in place for many decades to makes corruption almost like a legitimate business expense. Shipments get move around smoothly and normally without major delay as everybody is lubing the machine in the name of efficiency. I personally feel this is the pinnacle of corruption. You can stare right at it but wouldn't recognize it.

Developing Countries, like China. Everybody knows there is corruption but nobody is doing anything about it. Monies exchanged for special favors are deemed as part of everyday life. Different channels and points of contacts are relatively organized and established. Shipments are not held-up too much as it is easy to find whose palm you have to grease. Eventually, things would be moving ahead without too much complication.

Less-Developed Countries, like Indonesia, Vietnam. Corruption is like guerilla warfare. Oh, it's there all right. You just have pockets of gangs doing their own things with their own sets of rules. Shipment got stuck? You'll need to deal with whoever at his own set or rules, provided you find out who this person is. More often than not, you won't. Shipment will continue to get stuck until it gets shipped back or confiscated and sold to the highest bidder.

So here is the story of my latest venture into Indonesia with a shipment originating from China. There were two separate shipments, the first one was caught by the so-called "random inspection," the second one, which was shipped two weeks later, went through. The one that got stuck, got stuck for over a month. It was not sent by a no-name carrier; carrier was DHL. Turns out once caught, we need to provide a licensed importer in order to get the shipment cleared through the customs. Sounded fair at first. But after exhausting all of our logistics connections, none of our freight people seem to have the exact license that Indonesian Customs is looking for.

Wanted to pay people off to make this go away. But can't seem to find out who to pay off.

And then the new hit... Starting 2012, and the year just started, the Indonesian government is cracking down on Customs corruption. Since the new policy is still fresh, nobody is going to be taking any money from anybody to make anything happen.

I later hooked up with a couple of freight companies that specializes in going into countries such as Indonesia, each have their own special way. One flies a private plane, the other has a "fee schedule" for paying off different levels of Customs officials. In normal times, either way will work just fine. But at this special time when the government is actually doing something, the best bet is still go through the official channel (i.e. DHL, FedEx, UPS, etc.) and hope your shipment don't get caught in one of these "random inspections."

So, moral of the story is that, if you intend to ship stuff out from China to other equal or less developed countries, you need to keep the following in mind:

1). Always be prepared to pay more than the quoted shipping fee. There will always be things that comes up that will cost you more money to go through.

2). Always be prepared that the shipment will arrive late. Sometimes, it'll be a few days, weeks, or in my case, months!

Of course, there are also times when the shipment will just go right through. When that happens, call your buddies from high school that you haven't seen for a long while and go out for a drink. You deserve it!