This is a good read for sourcing products from China to sell.
This blog article was first published on www.sourcingallies.com
China, the World’s Factory
If you were to randomly ask companies in the US or Europe where they source their supplies from, a majority will likely to say China. Pose the same question to Amazon sellers, and they will cite China as their manufacturing hub. Some may have a ‘China plus 1’ plan, but their supply chain is pretty much unimaginable without the world’s largest manufacturer.
Low manufacturing costs, a strong business ecosystem, flexible suppliers, manufacturing expertise and efficient workers are strong points that other countries haven’t been able to replicate. China also dominates the supply chain on raw materials. It is a one-stop shop that global businesses have come to rely on and trust over the past decade when the country overtook the US as the world’s numero uno industrial powerhouse.
You may already have China in your sights as you lay the groundwork to become an Amazon seller. This article helps you understand what is involved in becoming an Amazon seller from the all-important aspect of sourcing products to sell. The focus of this article is on providing an overview of doing business with Chinese suppliers and the role that a sourcing agent in China plays in contributing to your success.
Selling on Amazon
Amazon is a tech behemoth dominating retail, cloud data and the voice commerce segments. As a mega-industry that weaves into several other industries, Amazon offers sellers incredible opportunities to find a profitable niche to sell.
The company’s ecommerce model, technological innovation and marketing strategy are responsible for propelling it to such great heights. Amazon makes massive sales, but small profits, which may be beneficial for its long-term profits, as this Vox article explains. A few points from the article:
- Amazon invests a vast majority of profits back into its business
- Amazon’s massive investments in its business have allowed the company to keep its tax bill low
- Amazon has very high free cash flow, exceeding the combined revenue of Twitter, Snapchat and Pinterest
- Amazon has created or established new industries
Key Amazon statistics
1. Amazon has more than 2.5 million sellers currently selling on the marketplace.
2. In 2019, there were 225,000 Amazon sellers with more than $100,000 in sales, representing a growth from 2018, when 200,000 sellers worldwide made over $100,000 each.
3. Amazon sells $4,722 each second, $283,000 each minute, and over $17 million each hour.
4. If Amazon were a country, its net sales would make it the 146th richest country in the world!
5. Online shoppers spend more time on Amazon than on the top nine online retailers combined.
6. 45% of US ecommerce spending in 2019 was on Amazon, a number which is expected to rise to 47% in 2020.
7. Most Amazon sellers use other platforms to sell their products. This is because of the growing competition on the ecommerce marketplace and the launch of its own private label brands.
8. In 2021, over 2.14 billion people globally are expected to purchase goods and services online, up from 1.66 billion digital buyers in 2016.
9. Amazon dominates Google as the preferred first channel for product searches online:
o 55% of shoppers between the ages of 13 and 24 begin their search on Amazon, compared to 17% on Google.
o 59% aged 25 to 34 embark on their initial search for products on Amazon compared to 27% on Google.
o 61% of those in the 35–54 age category prefer to start with Amazon while 31% choose Google.
o 56% of those aged 55 and older begin on Amazon while 25% prefer Google.
10. Amazon dominates UK ecommerce (30.1%), accounting for $30bn in sales in 2019.
Steps to open an Amazon seller account
Amazon offers Individual and Professional selling plans. The Individual plan ($0.99/item sold plus additional selling fees) is for sellers that move less than 40 units a month and aren’t planning to advertise or use advanced selling tools. The Professional plan ($39.99/month plus additional selling fees) is for sales of more than 40 units a month. On this plan, you can advertise your products, use advanced selling tools, and qualify to feature at the top of product detail pages.
After you have signed up for a plan, you can create a new account using your business email address. You will need to provide the following information:
- Your business name, address and contact information
- A phone number on which Amazon can reach you during registration
- An international credit card with a valid billing address
- Your tax identification information
How to Find Products to Sell on Amazon
Your biggest investment as an Amazon seller will be in your product. To increase chances of selling well, you should have a good idea about the best-selling products on the ecommerce marketplace. There are many ways to go about it, including:
- Doing a Google search of websites that have information on the best-selling items on Amazon. Amazon itself has a wealth of data for new sellers, including the top 100 selling items in all categories and subcategories, and Movers and Shakers — a list of items whose popularity has seen a dramatic shift in the last 24 hours.
- Using an Amazon scanner app, which gives you information on a product when you scan its barcode. You can see relevant metrics related to the product, including price, eligibility to sell it, and approximate profit.
- Check out the popular products on other major ecommerce marketplaces, such as the bestsellers on AliExpress and eBay’s Trending Lists.
- Set up Google Trends for popular or trending topics for stories, which can help establish a growing need for your product or business. This information is also useful in exploring potential products to sell in the future.
Keep these points in mind when zeroing in on the product(s) you will ultimately sell
- Try to fill a gap in the market. Your research will inform you about the sub-categories of products that aren’t well represented on Amazon. Go through customer reviews to identify gaps in the market, dissatisfaction with a certain product, or areas of product improvement.
- In a saturated market and popular product categories, standing out from the existing competition can be challenging. Find niches with a larger market that aren’t so fiercely contested.
- Aim for product differentiation. In many categories, you will find private label products that are virtually undistinguishable from one another. A novel product feature or untapped benefits can improve your chances of selling. You can also avoid pricing your product super low, and inevitably, also lower their perceived quality.
Options for sourcing inventory
Buying goods in bulk promises the benefit of inventory scalability. Once you’ve established a relationship with the Chinese manufacturer, you can negotiate better terms that help you address swings in demand more flexibly and support your cash flow.
You could buy products from a Chinese manufacturer, rebrand them with your logo, and sell them under your brand name. This strategy works well for products that aren’t on Amazon, although you need to invest in branding in-house or outsource it.
Buying items from a retailer at a lower price and reselling them on Amazon can make you a decent profit margin but it is not a suitable strategy to build a scalable business. Retail arbitrage may sound simple — you go to a Walmart or Target, scan all that you want to sell, and ship to Amazon. Third-party sellers on Amazon can fulfil orders through the company’s numerous warehouses. Fulfillment by Amazon (FBA) helps sellers grow their business without the need to invest in warehouses and staff.
Online arbitrage is like retail arbitrage, only you buy your inventory online rather than in stores. You can have the items delivered to an Amazon warehouse. Finding products for online or retail arbitrage, pricing them correctly to make a healthy margin, and managing logistics efficiently makes this model time-consuming. Some stores may have restrictions on selling items in bulk, posing a challenge in a market that receives a steady influx of sellers every year.
Which is the best option?
Sourcing products from China wholesale is recommended if you want to stay in the game for a long time. The barrier to entry is low, and your primary focus will be on finding a reliable Chinese manufacturing partner, which is easily achievable by going through a China sourcing agent.
On the flipside, you have to deal with fierce competition from Amazon’s Buy Box winners. The Buy Box is the white box on the right-hand side of an Amazon product page. Most customers buy through this section, which features the highest-ranked sellers at that point in time.
Online and retail arbitrage enable you to take advantage of market inefficiencies, bringing short-term gains but making scalability and long-term success difficult.
A private label approach has immense profit potential if you’re able to capture an untapped niche. You have the opportunity to build a brand from scratch. Your success will depend on the effectiveness of your advertising strategies. You may also have to contend with longer lead times compared to wholesale goods.
Just about anyone can sell on Amazon
Your start-up costs for selling on Amazon will depend on whether you’re purchasing inventory from a retail store or wholesale supplier, or manufacturing products from scratch (private label manufacturer). Apart from the costs of buying inventory, other costs include opening an Amazon account, buying your 12-digit Universal Product Code (UPC), product photography, and logo creation and branding.
The products you’ve received from your Chinese supplier don’t meet your quality expectations. You are mulling legal action to get your money back. But first, you want to see if negotiating with your supplier will work. You send a letter in Chinese to your suppliers and negotiations follow. One of two things can happen: you get some of your money back or nothing at all. In the latter outcome, your lawyer reviews your situation and determines chances of prevailing if you bring a lawsuit against your supplier.
Your supplier will already be prepared with their defense: if you wanted better quality, you would have had to pay more for it. It is a common one used by Chinese suppliers and often works in their favor. Perhaps there were communication gaps from the beginning, only you were unaware of it and believed that your supplier was on the same page as you. Or maybe you didn’t quite get it right from the beginning and the inevitable happened.
You can easily avoid the common pitfalls in sourcing from Chinese suppliers. Here’s a look at the five most important actions to take.
1. Verify suppliers
The most important step in contract manufacturing is identifying reliable suppliers with whom you can potentially build long-term relationships. This is especially true if you’re looking for Chinese manufacturing capabilities such as metal stamping, die casting or injection molding.
First of all, you want to verify that you’re engaging a factory and not a middleman. Then, be sure that the manufacturer has the technical expertise and manufacturing capability to produce what you need. Include these verifications in your investigation:
- The factory’s Chinese name, location and the local government office under whose jurisdiction it falls. Chinese companies doing business with foreign companies and foreigners have an English name to make it easier to accept payments via internal money transfer methods. This ‘alternative’ name can be:
o A Chinese sounding name (Pingan (平安 / píng ān)
o A name that is a word in English (Garden (嘉顿 / jiā dùn)
o A compound name in English (NetEase (网易 / wǎng yì)
o A made-up name (Midea (美的 / měi dì)
- The manufacturer’s audited accounts, Value Added Tax invoice and product samples
2. Know how to leap over the language barrier and cultural differences
Cross-cultural challenges from doing business with Chinese suppliers should not be an afterthought. Sure, it helps to consult people with experience working with the country’s businesses, but this knowledge is insufficient. You need someone who is proficient in Mandarin and deeply familiar with Chinese cultural quirks to represent you. A China sourcing agent is your best bet because their support extends from the time you begin your search for a Chinese supplier till your order is shipped.
As an example, Chinese suppliers hesitate to ask questions or seek clarifications out of a fear of losing face. It can come up when your product isn’t up to the mark and the manufacturer cites not understanding your requirements fully as a (convenient) reason. A competent sourcing agent will anticipate this tendency and spell out all your specifications to the manufacturer so there is no room for doubt or confusion.
When you’re shortlisting suppliers, you could rank suppliers who ask questions higher. A supplier who doesn’t shy away from asking for clarifications may also be transparent about any production issues or delays. This is yet another quirk — hiding bad news rather than trying to work out a plan that helps both parties tide the problem over. Here again, a China sourcing agent has your back by maintaining frequent contact with the manufacturer to ensure that everything is going smoothly.
3. Remember, when you go low, they go low
Low labor cost is one of China’s charms as a contract manufacturing hub. But going after super low prices always has repercussions.
Your market research will tell you what the price floor is for the product to be manufactured. By definition, a price floor is a group- or government-imposed price limit on how low a price can be charged for a good, product or service. Manufacturers have a price floor for the type of product you want to sell. Any supplier who undercuts this price floor substantially is bad news.
They could be compromising with raw materials, or bypassing steps in the quality control process, which pretty much assures bad quality. It is possible that their workers may be enduring low wages or poor working conditions. This could hurt your reputation in the long-term and even have legal implications.
4. Explicitly state how you want your product manufactured
Your manufacturing contract should set out clearly and in detail the quality control specifications against which you will measure product quality. It is the most you can do to ensure that your order adheres to the desired quality standard.
There is a risk that the sample the supplier sends you is perfect but your order doesn’t emulate the same quality. As an extra measure, negotiate with your supplier about including a provision that links your payments to certain quality checkpoints being met. This will compel suppliers to meet your specifications to a tee and avoid quality-related disputes.
Giving your manufacturing contract the attention it deserves also cushions against sudden price changes after manufacturing is under way. Sometimes, an increase in price is beyond the manufacturer’s control, in which case they will be reasonable towards you, particularly if you’ve spoken about future orders. By and large, a price change from gaps in communication or emphasizing specific details is preventable.
If you will be interacting directly with the supplier, follow up important emails with a phone call to ascertain that they have understood your message. Assign one or two point-persons to interact with the supplier. This will prevent confusions arising from conflicting messages.
5. Conduct regular quality control inspections
A visual inspection of a factory is important but insufficient. The manufacturer needs to integrate quality throughout every step of the production process. Regular quality control inspections catch problems in the production problem early on. The certainty that their raw material and production steps will be scrutinized keeps the manufacturer committed to delivering the desired quality. Rectifications can also be made quickly to avoid affecting lead times and delivery dates.
Make sure your supplier agrees to the terms of quality in a contract and provides a quality inspection report with the shipment.
What to Do if You’ve Received Bad Quality Products
When your consignment doesn’t meet the expected standards, determine the type of problem that needs fixing.
- The dimensions don’t meet acceptable specifications
- Inferior or wrong quality of raw materials has been used
- The finishing is below par
- The packaging is sub-standard
- The goods are damaged
- The wrong quantity of goods has been delivered
The first issue can be resolved in some cases — small holes can be drilled larger and inconsistencies rectified if the usable width of the material or fabric is greater than that specified in the contract. Issues related to raw materials are impossible to fix while finishing, packaging and wrong quantities can be addressed. Let’s take a look at the various scenarios that can play out and your options in each.
#1: You made a one-time purchase from a trading company or directly from a Chinese factory
The dispute may be not solved to your satisfaction as it is very likely that the supplier will stop responding to your requests for a refund or replacement. If you sourced from a legitimate and otherwise trusted company, you may be able to recover some of your money but don’t hold your breath if your contract does not explicitly mention quality requirements. You have a good chance at a refund if you’ve sourced from a supplier on Alibaba and a solid contract. The company’s Trade Assurance service offers full payment protection to buyers if quality falls outside predetermined quality standards, or if shipment is delayed. However, as a third-party inspector will assess your claims, the refund process may be lengthy.
#2: You made a one-time purchase using a China sourcing agent
There is a much smaller risk of quality related complaints when you go through a reliable China sourcing agent. As we’ve already discussed, your agent will help you cut through cultural barriers, clarify all terms and conditions of your contract to the manufacturer, and perform factory audits and process checks. Despite these preventive actions, quality can sometimes leave much to be desired. When this happens, your sourcing agent can initiate and coordinate dialogue to a hopefully satisfactory resolution.
For fair and effective negotiations, you must establish the lapses that occurred and who is at fault. With this information, you can argue a strong case for replacing your products, fixing the products (if possible), or getting a complete or partial refund. Once again, the contract you’ve drawn up will matter immensely in reaching a deal you can live with.
#3: You have a long-term relationship with the supplier through a trading company or sourcing agent
This is the best-case scenario for a refund or replacement. If the supplier generates recurring revenue from you, they will offer to fix mistakes. They may send a batch of products against which a previous payment can be adjusted, or replace the entire faulty consignment, this time taking care to meet your exact specifications.
The only issue you will have to contend with is the lead time to replace products. Longer lead times for complex products may require you to push back your delivery dates. On the bright side, you can get through the mess without having to pay any additional cost to your supplier.
Negotiating with suppliers versus suing them
Arbitration and litigation are two options. Pursuing legal action is expensive and time-consuming. Your consignment may not be big enough to warrant it. You may not want to spoil your relationship with a long-standing supplier over a small or lower-value consignment.
If you decide to take your supplier to court, you will be fighting your case in Chinese courts. International litigation can be a complex and stressful affair, disruptive to your business and personal life. Suing a business for breach of contract is not straightforward. For example, you may already have a weak case if you don’t have the following documents:
- A contract containing the specifications, and the acceptable and unacceptable limits of the manufactured product.
- Evidence of payments to the supplier you’re bringing the case against, and not the third-party.
- Your supplier should have assets that can be attached, and they must be located in the jurisdiction stated in the contract.
You will also need to consider aspects that are important from a legal perspective, such as whether or not a third-party inspection was conducted prior to shipping the products, and if the contract stipulated a dispute resolution mechanism, in which case, you should have exhausted this avenue first.
Filing a lawsuit against your supplier in a U.S. court makes no sense because Chinese courts don’t enforce judgments issued by courts in western countries.
In all likelihood, your supplier wouldn’t want the bad press from being dragged to court, especially when the company in question is pretty well-known. Generally, suppliers are willing to negotiate with you out of court. Make sure you add an arbitration clause and you can work at solving quality control issues economically. In case the contract was not signed, you may still be able to use arbitration if other documents, including emails between you and your supplier, mentioned this dispute resolution method.
When you don’t want to sue and your supplier is unresponsive, cut your losses and move on quickly. You may want to, for your satisfaction or as a warning to other unsuspecting foreign buyers, leave negative feedback about the supplier on social media. You could also blacklist the business on supplierblacklist.com, a free user-generated platform that doesn’t have any incentive to favor problematic suppliers unlike most online supplier directories that sustain on listing fees and commissions from suppliers.
Order Financing and Cash Flow
Running an Amazon business doesn’t require you to dip into your savings to pay suppliers and honor customer orders as they start trickling in. You can get an advance from a Purchase order (PO) to pay your suppliers for goods you’re selling to customers who have completed a written purchase order. You can fund up to 100% of your purchase costs at an average rate of 3% every 30 days on utilized funds, with rates as low as 1.6% to as high as 6% per month.
PO financing is intended for wholesalers, distributors, resellers, and importers or exporters of finished goods. It is ideal when:
- You don’t directly manufacture the products you sell on Amazon
- You buy goods from a supplier and resell them without modifications or customizations
- Your supplier is a business with a good credit history and track-record of delivering goods
- The purchase order meets a certain minimum value
How PO financing works
1. Your customer places an order for toys worth $10,000. Your supplier charges $6,000 for the toys and expects you to prepay this amount.
2. The PO financing company reviews the transaction and confirms it meets their funding requirements.
3. The PO financing company pays your supplier directly through a letter of credit. For foreign suppliers, payment is always made using a letter of credit; a wire transfer may be applicable for domestic suppliers.
4. The supplier delivers the toys to you or directly to your customers. Upon receiving the toys, the customer inspects and accepts the order.
5. You invoice your customer, asking for immediate payment or spell out net terms.
6. The customer pays the full price on your invoice to the PO financing company.
7. The PO financing company deducts their fee and pays you the balance amount.
Situations when PO financing is useful
During a spike in sales, your purchase orders may exceed your working capital. In this scenario, PO financing helps in fulfilling orders and reduces demand on your working capital. Small businesses encounter cash flow problems at one time or another, with some coming up against the issue every month. PO financing is also useful in smoothing out cash flow problems at specific times of the month.
If you’re experiencing sudden, rapid growth that outpaces existing bank lines, PO financing is an excellent funding source to support growth opportunities.
Cash flow management
You may have a reliable supplier and a steady order book. But how well you manage your cash flow will determine the success of your business. Amazon pays you every two weeks, so you will need to wait for the automatic disbursements come through before you allocate funds for your next inventory order.
You can optimize your cash flow without increasing your reliance on external funding. Here are some ideas to explore:
- Reduce inventory: When you overorder rather than order enough to keep stock, your cash flow is affected as it takes you longer to realize returns. Assess your inventory turnover, the number of times your business sells or replaces inventory during a given time. With time, you will also be able to plan inventory based on seasonal sales fluctuations to some degree (it is impossible for humans and sophisticated demand management tools to forecast the future).
A good Amazon inventory management software can help you more easily manage item and inventory data, show customers accurate product availability and if you’re selling via other channels, synchronize updated inventory counts in real time.
- Reduce lead times: The longer the lead time, the more inventory you will hold. Many Amazon sellers are okay waiting 20 or more weeks between order and delivery. It’s not always about geography — shipping products from China to the USA or Europe takes 3–4 weeks. Factors you should worry about are delays processing orders by you or the supplier, delays in arranging payments, delays in shipping or at docks and ports, capacity problems at your supplier, or miscommunication.
You may be able to avoid these issues by partnering with a reliable China supplier. In any case, you need to understand the drivers of lead time for your product and factors that you and your supplier can control to keep lead times short.
- Reduce MOQs: Most manufacturers make a small margin across a large number of units, which is why they set a minimum order quantity to justify their time. They may make top-quality products and offer excellent service; their MOQ is simply an indication of the price and MOQ of the raw materials they must purchase to make your products. But if it will leave you with excess inventory that doesn’t move within 90–120 days, you must negotiate a lower MOQ. A sourcing agent in China can help you form a long-standing relationship with a flexible, capable manufacturer.
- Negotiate favorable payment terms: The less money you pay upfront, the more cash you can free up for your business. Determine the payment terms and methods taking their impact on cash flow into consideration. Be upfront about the terms to your supplier so they can plan their time and quote prices that make meeting those terms viable.
The common terms are 30% down payment and 70% when products are ready to ship. As your relationship with your supplier matures, you’ll be in a better position to negotiate a better split, but a flexible approach can be better for the long-term. What does that mean? Say you have a well-established product that is in great demand. If you can reduce the price of that product, you’re likely to make more sales. You could negotiate a higher down payment with your supplier in exchange for a discount on the price of the product. This win-win for both parties can help you secure favorable payment terms in the near or distant future when you’re faced with a short-term cash flow crunch.
Custom Branded Products
Sourcing products from overseas manufacturers and selling them under your label has many advantages. Your choices in manufacturers and manufacturing styles are vast enough to help you bring out new or better products in untapped niches. You can make minor modifications to existing products or produce unique or specialized products.
Similar to sourcing China wholesale products, you can scale your business with custom branded products made by private label manufacturers (premium skincare products for instance). As you won’t be producing your own products, you can keep costs on the lower side and boost margins. If you already have a production facility, a Chinese manufacturing partner enables you to offer more products without having to expand your own operations.
However, when you decide to put your brand name on a product, quality comes into sharp focus. That’s not all; you must be transparent about your sourcing strategy when customers inquire about it. Factors like the prevailing sentiments about the economy and political sentiments can influence consumers’ decisions on custom branded products made by foreign manufacturers.
You will also need to take proactive steps on protecting your private label. Fortunately, in the last few years, China has implemented more protections in place, from amending the trademark law in 2014 to establishing specialized intellectual property adjudication tribunals in Nanjing, Suzhou and Chengdu. Still, the infringement of intellectual property rights keeps occurring in the country, making it imperative to take these three steps:
- Register your trademarks, design patents and copyrights in China.
- Make strong NNN or non-disclosure, non-use, non-circumvention agreement to safeguard your IP rights. It should be in Mandarin and drafted to be enforceable in Chinese courts.
- Choose a reliable manufacturing partner interested in a long-term relationship.
Doing business through Amazon is lucrative. Not everyone joins the bestseller ranks and makes six-figures annually, but smart sourcing puts you at an advantage and sets you up for success. Online and retail arbitrage are only for sellers that want to get in and get out at the right times. If you’re committed to a long-term opportunity on Amazon, wholesale suppliers and private label manufacturers provide a solid foundation that you can build-off and take your Amazon business to great heights.
Chinese manufacturing has stood mighty against low-cost competitors such as India, Mexico, Thailand, and Vietnam. Finding suppliers outside of China can be tough. You may also struggle to get better value, factors like product quality, manufacturing capabilities, faster lead times and honest suppliers, considered. Moving a part of your supply chain away from China may make sense if you’ve computed that diversification can yield net benefits, but supply chain experts caution against alternative suppliers without being absolutely sure that they can deliver.
A sourcing agent in China makes the path to finding the right supplier smooth and serves as an ally throughout, from the time you select a manufacturing partner until the products arrive at your destination. With an experienced agent by your side, you never have to feel overwhelmed navigating manufacturing and shipping complexities. You can take decisive actions that boost your chances of healthy sales and margins on Amazon.