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Sourcing: Who Makes the Money?

THE SOURCE CODE BLOG

There’s a popular expression which came about during the gold rush era. It states “You can either mine for gold or sell pickaxes.” 

This saying is mainly applied for when a new technology or trend emerges in business – say mining for gold, use of social media or sourcing from China. And while it may be a bit of a stretch to directly compare the gold rush era to our current time period of sourcing products from China. The mechanics remain the same.

Organizations in the 20th century started migrating people, process and supply chains to an area where dramatic reductions in product costs were discovered. Not too dissimilar from the 19th century when workers migrated to California and Alaska where massive amounts of gold deposits were discovered. 

The goal for the 20th century business man, organizational prosperity. The goal for the 19th century miner, personal prosperity.

This brings me back to the quote at the top of the page. In our current era, organizations can either source products from China (mine for gold) or create tools to help others facilitate their sourcing venture (sell pickaxes). As in the goal rush era, there are an equal number of successful companies participating in sourcing (mining) and selling service tools (pickaxes). So which group is more successful?

To help with this I thought I would make a list of the main profiteers from our current version of the gold rush.

Group 1: The Miners

  • China Manufacturers – It’s obvious… I know. But someone has to make the products! Standard profit margins range from 3-10%.
  • Sourcing Professionals – Help ensure quality supply and will assume the role of project manager. Net margins can range anywhere from ½-50%. All depends on the nature of the work. From simply submitting an order to full service product development.  
  • Organizations importing – A good amount of profits are made here because these companies gain the benefits of buying in bulk, receiving cheaper prices. They can then break down the larger orders and sell to other consumers in smaller quantities at higher prices/margins. In certain instances companies can private label the products they import giving them the possibility to create a brand name and charge consumers even more for their goods.  

Group 2: The Pickaxe Salesmen

  • Inspection companies – The work is labor intensive therefore giving these organizations the opportunity to charge more for their service. However because the work is un-standardized company reputations determine what price the market will bear for each individual company.
  • Lawyers/Accounts – They help with contract, agreements, patents, trademark protection, etc. Unlike inspection companies it doesn’t seem to matter the skill level, these guys always find a way to make an exorbitant amount of money!
  • Trading companies – Garner a small service fee in exchange for processing orders for the manufacture. They can represent multiple factories and receive 1-5% per transaction.
  • Testing Labs – Such as Akron, UL, etc are making good money testing and certifying Chinese sourced products. Testing branches are making upwards of 30+% per test and the big names combined, have a market share of over 75%.
  • Freight Forwarders – Low margin and high competition but lots of transactions. Forwarders with good relationships or who work with large importing organizations can benefit greatly from providing this service.
  • Software Solution Providers – Selling business solution technology to manufacturers, importers, forwarders, inspection companies, sourcing professionals, etc. As with all software, once it’s developed/marketed their economies of scale plummet. Meaning each additional unit sold harvests greater and greater yield with an average gross profit of 80-100% and beyond!     

That’s it for today. Stay tuned for the next weeks post.

(For more than 10 years, GCP Industrial Products has successfully offered its customers a unique sourcing process that allows them to save money, streamline their supply chain and grow with new products. Our plans are to continue to grow based upon mutually beneficial relationships and the quality of our products and services to our ever growing customer base. To contact us please click here or phone 1-888-893-5427. Thank you.)