Three years ago, Amway, the U.S. direct sales giant, began shifting some production of its 1,700 different household products overseas, where 90 percent of the parent company’s $11.3 billion in revenue come from.
“Before May 2010, we made everything in the U.S. for all the world except China,” said George Calvert, Amway’s vice president of R&D and supply chain. In that month, it decided to change its supply chain model because of economics and consumer perceptions of a particular product.
“Most of our sales of durable goods were in Asia, and consumers don’t care where durables are made,” Calvert said. “By shifting production of durables and heavy home care products like liquid laundry soaps to Southeast Asia, we are realizing significant savings.”
Amway found that duty and transportation costs of shipping products from the U.S. were almost three times the direct labor costs of manufacturing in Asia. The privately owned company, based in Ada, Mich., is saving about $10 million a year in transportation costs and $8 million in tariffs by locating its product sources closer to its overseas markets. Calvert said Amway is now about three-quarters of the way along in shifting sourcing closer to its biggest overseas markets.
Amway, which generates most of its global revenue on the model of direct door-to-door sales that it started in the U.S., uses a slightly different model in China, where it also operates some stores. For example, it has a shop in Shanghai with more than $100 million in annual sales. China, Amway’s biggest single market, generates more than $4 billion in sales and is the largest seller of nutritional products, with dominant positions in products such as protein powder.
“You can imagine for a market that’s a little short on protein and long on wanting to develop their kids, it’s a great product to have,” Calvert said. “Producing in China for China is a requirement of our business license,” he said. “They are not going to let you operate the business productively by importing.”
There is one big exception to this model. With almost half of Amway’s global business — 46 percent — generated by sales of Nutrilite products sold in China as well as Vietnam and India, Amway safeguards the reputation of these products by supplying them from plants in the U.S. Consumers in China and around the world are concerned about the safety of consumable products. “Made in the USA still has cachet in China,” Calvert said.
Amway also supplies the core technology for its water filters in the U.S. for the water purification products made in China. It ships about 10,000 40-foot-equivalent units annually in its global supply chain, of which about half are shipped on the westbound trans-Pacific to Asia.
“We’ve enjoyed very favorable ocean freight rates and very favorable lanes for a long time on exports from Los Angeles to Busan, South Korea, where we have a major distribution center for North Asia,” Calvert said. “The carriers love us because we pay them to ship containers back to Asia.”
He said freight rates on the westbound trans-Pacific are very low and he expects them to stay there this year. “We continue to see our rates go down, and we would expect to be near bottom in 2013.”
He said he was worried about the financial health of his motor carriers. “We use a lot of regional motor carriers, and we’ve seen several go belly up, so we try very hard to keep people in business because we want competition.”