There are a lot of moving parts when sourcing from China. Stay on the path to sourcing success. Here are some key things to consider.
This blog article was first published on www.sourcingallies.com
A lot of innovation is coming out of Chinese firms, which is great news for Amazon sellers focused on a China sourcing strategy. An improvement in quality systems, materials engineering and industrial engineering capabilities is creating opportunities for importers seeking to bring new or differentiated products to market.
Chinese factories have established themselves as leaders in production scale and they can churn out mass customizations at low price points, making China the top choice for common goods typically purchased wholesale for retailing on online marketplaces.
Whether you’re interested in selling sophisticated electronics or plastic toys, certain considerations are important to business success.
1. What the market wants
Market research is the first step in a sourcing strategy. You may have retailing or importing experience related to a category of products that generates good margins. In this case, the logical next step is to find a supplier in China that makes those products and has experience selling to Western companies. If you’re a complete newbie, you have the big task of figuring out what to sell on Amazon. Here are some ways to understand which products retail well on Amazon and the most popular products imported from China.
Amazon’s list of best-sellers is a good starting point. The list is updated on an hourly basis. Popular categories on the site include home and kitchen items, clothing (including accessories, shoes and jewelry) and of course tools and home improvement items. However, choosing a product from a popular category would mean going head-to-head with established competition. Unless you can distinguish your product or undercut the competition, hitting the desired sales numbers will be difficult.
Conduct keyword research on Amazon. A simple way is to just type into the Amazon search bar and see what comes up. These results are reflective of the products customers frequently search for. If you’re interested in retailing radiator caps, you’ll see it’s a frequently searched product and that same search will direct you to other highly sought-after items.
Use keyword research tools to find high volume and high value keywords on Google is beneficial as those same items are also worth targeting on Amazon. Google’s Keyword Planner is a free tool that you can access with a Google ads account. Identify which long-tail key phrases have a relatively high volume to gauge demand. For example, ‘stainless steel brackets 3 inch’ may have a high search volume while there may be fewer or possibly no searches for stainless steel brackets in other dimensions. You can also use the Keyword Tool designed specifically for Amazon. The Pro version of the tool generates twice the number of Amazon keywords compared to the free version.
Use market intelligence tools that provide sales estimates for products on Amazon. These tools use real-time and historical data to project both estimated monthly sales and monthly sales revenue. An idea of how many products you might sell each month, and the profit you can make on a specific product, can help you choose a great product to sell on the leading marketplace. This information is also useful in planning the amount to invest in the product, and the units of inventory to order from your China manufacturer.
Find profitable products imported from Alibaba, a popular China sourcing platform. The Autosuggest feature offers clues into common searches. Here you can see the price quoted for each product and calculate the total cost to you by adding the shipping cost, custom duty, insurance cost and other applicable taxes, to this amount. Then check the price against those products on Amazon. Subtract your total purchase cost from the selling price to estimate the profit you can make.
2. How to ensure quality and quick deliveries
Chinese factories have been stepping up to importers’ demands for new electronic and mechanical products. You may be interested in selling products that need to be manufactured to exact technical specifications. Once you’ve confirmed the demand for a specific product, at a price that you can justify, your search for a Chinese supplier can begin.
You may want to work with a manufacturer that specializes in making the product and has the capability to fulfil orders without delay. Amazon sellers retailing new mechanical or electronic products aim to get the first batch of products on the market as quickly as possible, acquire customer feedback, and use that revenue to get the ball rolling on the second batch. The goal is to get in front of customers before other sellers enter the market and compete for all the attention.
If you’re selling a technically complicated product that is in demand or one that must otherwise follow multiple technical requirements, quality and lead times will be a priority. Partnering with the right factory puts you on a solid footing, but it is also the most challenging aspect of your China sourcing journey. A sourcing agent will not only connect you with the right supplier but can also save you time in reviewing different factories in the country.
A China sourcing agent helps you overcome these hurdles:
- Identify particular local experts from the large variety of processes available in key manufacturing zones, including die casting and forging, plastic injection molding, and metal fabrication. If you’re interested in specific industrial cities such as Shenzhen or Huizhou, the agent can pinpoint different local suppliers by your technical requirements, review the bids, make an educated selection, and send you a quote.
- Conduct a detailed factory audit. Here, the ability to converse in Mandarin is helpful in correctly assessing the advantages and drawbacks of working with the particular manufacturer. Other than the production aspects, corporate information such as management structure should also be clear to determine the ease of communicating with the supplier from a different country.
- Follow-up with the supplier and stay on top of your order. Chinese suppliers are often reticent about seeking clarifications about technical specifications and sharing bad news. A sourcing agent acts as a liaison, double-checking if the supplier has understood your requirements correctly.
- Perform in-process quality inspections after production has begun and additional inspections, such as packaging and shipping marks. This extra layer of control goes a long way in ensuring consistency with all your requirements.
Sourcing agents’ proximity to production makes them a valuable ally for Amazon sellers. Chinese manufacturing depends on different tiers of suppliers. The interdependencies and supplier density strengthen manufacturing and create opportunities for sellers. Teaming up with a sourcing agent is a hassle-free way to draw on this strength and explore innovations down the line.
3. How to pay for purchases
A letter of credit (LC) is a commonly used financing tool that offers access to credit lines, allowing you to purchase items from overseas suppliers. This offers the provider of goods peace of mind that payment will be fulfilled. It is a document issued by the bank or financier agreeing to be the intermediary between you and your supplier.
LCs offer clarity on the transaction, detailing all the goods to be supplied and offering you assurance that your shipment will not be vastly different from what you ordered.
While letters of credit offer security, banks have charges for providing them, so a cost versus benefits analysis is recommended. Some suppliers may insist on a letter of credit as standard practice or for the particular commodity. When you have no choice but to request a letter of credit, inspect the documents carefully as even a minor error can result in delays, extra costs and other administrative hassles.
Letters of credit can be irrevocable or revocable. A revocable LC can be changed or cancelled by the issuing bank at any time, for any reason. An irrevocable LC cannot be cancelled or changed without the consent of all parties involved in the transaction, thereby offering better security than revocable LCs.
A revolving letter of credit covers multiple transactions between the buyer and seller. A standby letter of credit is an assurance the bank gives the supplier about your payment capacity. This is suitable for a mature business with a healthy cash flow as the supplier doesn’t expect to draw on the LC to get paid.
Purchase order financing is an alternative to letters of credit. The bank or PO financing company pays the advance or outstanding amount on goods to the supplier. This type of credit is made available for a short period of time. The financier will charge interest on the utilized funds. PO financing may not be available for the sales of common goods, so check if it applies to the product you’re sourcing from China.
4. How to handle a price increase
It is not uncommon for suppliers in China to increase prices once production is under way. Changes in price can be due to an increase in the costs of sourcing raw materials or a countrywide event that affects production costs. You can avoid big price fluctuations by asking your supplier to provide a validity of the quoted price. The “valid until” period can be as short as 90 days or extend past a year for large orders. To be on the safe side, negotiate a validity of at least 180 days.
- The promise of a re-order can persuade the supplier to quote the previous order price for your current order.
- Check the price of the primary raw material used to make your product. This will tell you if the supplier is justified in adjusting the quote.
- Add provisions in your contract that protect against sharp price increases over a longer term. Your buying terms can include a minimum validity of prices and/or a discount on your next large order.
5. What to do when your order doesn’t match expectations
Your consignment may not meet your requirements. This risk often stems from partnering with a sub-par supplier or driving the price down too low, which never bodes well for overall product quality. If your instructions were lost in translation, the supplier may have made items that don’t fit your stipulations but are otherwise well-made in terms of strength, finish or durability.
For example, if product dimensions don’t meet acceptable standards or packaging is tacky, you can have the supplier make necessary changes. If you’ve received damaged goods, you can request a refund or replacement. When the issue can be traced to inferior quality raw materials, you will need to work out a deal with the supplier. In this scenario, the supplier may become uncooperative, leaving you with two choices:
- Arbitration, where a neutral third party settles the dispute out-of-court
- File a lawsuit against your supplier in a Chinese court
To handle disputes amicably, sellers include a dispute resolution mechanism in the contract. Going through a sourcing agent makes these matters less complex as both their physical proximity to and existing relationships with suppliers achieve favorable outcomes.
Neither you nor the supplier would like to get embroiled in litigation. If the issue is with a lower-value consignment, it is better to cut your losses and move on.
Tips for a trouble-free China sourcing experience
- Visit the supplier’s factory to confirm that they’re not the middleman. With a sourcing agent, you can be a 100% sure that you’re partnering with a reliable manufacturer.
- Chinese business culture emphasizes face-to-face conversations. Despite technology advances and ubiquity, it remains the best way to do business in the country.
- Give a realistic estimate of purchase quantities. Chinese manufacturers have small margins, and will adjust quality to meet their profit goals.
- Do your research on the costs of raw materials required to make the product and the price floor, the lowest price at which the product can be made.
- Ensure a 2–3 week safety net for deliveries, accounting for delays and unforeseen circumstances. Increase safety to a month for a new supplier.
- Create a solid contract that protects your interests during a dispute or a steep price increase. Be aware that contract conditions are often renegotiated during the course of your relationship. Concessions from both sides are common, and the focus is on achieving mutual long-term benefits.
If your supplier has disappointed you the first time, they might not delight you on subsequent orders. Have a back-up in place and be open to switching to a better supplier for your next order. Continuing with an unreliable supplier will only hurt your business.