Outsourcing Manufacturing and Dropping Oil Prices

When looking into the cost of outsourcing manufacturing to China, one of the biggest costs that one must consider is the price of shipping. Unfortunately, this cost is anything but stable – it rises and falls with the price of oil (among other factors), and it can be difficult for some companies to calculate shipping costs if they haven’t been in the business of international manufacturing in the past. Today’s economy has seen a rather rapid drop in the price of fuel, and thus the cost of shipping is changing. What the means for you as a business with an overseas partner, though, can be complicated.

On one hand, it’s certain that the price of the fuel used by your shipping companies has dropped. What might not have dropped, though, are the prices. Many companies were barely holding on during the era of the highest oil prices, and are now trying to recoup their lost profits by holding on to higher prices even as their fuel costs less. Even if the prices have dropped, though, you might not see much of a difference – there’s not a solid connection between the actually drop in price and the amount by which most shipping companies have reduced their prices.

Still, there’s a good chance that your shipping companies has dropped prices for the moment. This might lead to a few months worth of higher profits for you, but don’t get used to it – oil prices fluctuate wildly, and they rarely have anything to do with the usual market forces. It might be wise for you to place larger shipping orders from your outsourcing partner in the near future, but don’t make any long-term plans that will endanger the security of your business or of your profits. Ride out the wave in the same way that many shipping companies are doing, and simply enjoy higher profits at your usual budget.

You should also make sure that you know what your contracts state in terms of shipping. If you’re the rare business that includes shipping in its fulfillment contracts, you really might not see any drop in price at all – your partner will save money, not you. Unless you want to renegotiate, you’re paying for the privilege of having relatively lower shipping costs when oil goes up. While it can be frustrating to know that you have the ability to save money elsewhere, it might not be worth endangering your manufacturing relationship.

So, what does low cost oil really mean for outsourcing to China? If you’re under a contract with a set price, not much. It does mean that you have the possibility of saving money over the short term, but it doesn’t necessarily mean that you can count on those savings in the future. If anything, it means that now is a good time to start planning for the lean times with your partner – make sure that you have the right budget for shipping costs to change, and that you know what to expect when oil does finally return to its old prices.

For any questions about the process of manufacturing in China, contact ITI Manufacturing today.

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