Sourcing from China: 7 Mistakes and How to Avoid Them
There are plenty of mistakes that can be made when sourcing from China. Here are a few of them and what you can do to avoid them.
This blog article was first published on www.sourcingallies.com
The world’s exposure to China has increased tremendously but the country is not as globally integrated as its scale may indicate. While importing from China is never off the table for Western businesses, they openly bemoan about the complexities of sourcing from the Asian giant. Mistakes can be common yet are avoidable with sufficient research, due diligence and involvement throughout the purchase process.
Here is a look at the seven blunders that can cause difficulties when you’re trying to build a long-term relationship with a Chinese manufacturer.
1. Not auditing the supplier
Regarded supplier directories like Alibaba, Made in China and Global Sources have their share of unscrupulous businesses. It goes without saying that you may buy into claims that may be half-truths or outright lies. In a worst-case scenario, you may end up working with a trading company driving up your purchase costs.
An audit of the Chinese factory entails a visit to the premises — by you or a third-party auditor. An in-person meeting with the supplier is a great start to your business relationship given how Chinese business culture emphasizes ‘guanxi’ — a key system of beliefs that accentuates the fundamental dynamic in social networks or interpersonal connections. If you cannot make it to the country, don’t skip the audit entirely believing that if everything else checks out, you haven’t any reason to worry.
A factory audit is the only way to check the supplier’s quality management systems, number of staff, business license, and customs registrations certificate. You will understand how their business works, and meet the decision-maker at the factory who might be your single point of contact (SPOC) for all engagements.
Face-to-face inquiries also give you a good sense of what you can expect from the supplier. You can catch non-verbal cues and tell if the supplier is being transparent or not. For example, you want to be sure if product inspection will occur for every batch and at different stages of production. And will the factory send randomly selected samples for laboratory testing? A factory visit will allow you to rate suppliers more precisely and choose the right business for your requirements.
2. Not ordering product samples
Relying only on your specifications and drawings to have the product made is never a good idea. Your supplier may not go through your entire specification document. They may miss one or more details, impacting product quality. Ordering samples from different suppliers is standard practice for buyers. The sample is evidence of the supplier’s ability to manufacture your product to the desired specifications.
It also serves as ‘practice’ for the supplier to come to grips with what you really want. If the quality is good and only minor revisions are needed, you can provide feedback on the sample and give the manufacturer another try. A sub-standard sample may require you to change your supplier.
Typically you will get a great looking sample because suppliers are trying to win your business. Odds are that there is always a chance that the supplier may have purchased the ‘golden sample’ from another manufacturer. There is always a risk that the order you place based on your satisfaction with the sample may not turn out to the same standards simply because it has been made at a different, low-cost factory.
A sourcing agent eliminates this risk by supervising how quality control is done at the factory, and ensuring that your product undergoes multiple checks at different stages of production. The agent may station one of their representatives at the factory to carry out inspections. They will also conduct a pre-shipment check and give your merchandise the all-clear or revert to the manufacturer in the event of any issue. You get full value for what you’ve paid, and avoid any dispute arising from quality defects.
3. Believing that the manufacturer understands your requirements
The language barrier can make it difficult for you to get your requirements across quickly and clearly. As part of their culture, ‘losing face’ is also seen in interactions with Chinese suppliers. The concept of ‘Chinese face’ is less individualistic and more relational. Chinese businesses care about how they are viewed by others and conduct themselves in ways deemed ‘socially acceptable’. This includes embellishing the truth to save face.
Your supplier may have an English-speaking salesperson to answer your questions. But these personnel may not be present on the factory floor or have decision-making power. Communicating technical specifications with sales representatives may be tricky because they may not fully grasp what you’re saying and in turn they resist asking for clarification to avoid ‘losing face’.
You cannot afford to assume that the supplier has understood your requirements if they don’t get back with questions. Put everything down in writing and go over your checklist via video chat or phone call with the factory manager or a staff member on the factory floor. Encourage them to seek out clarifications and reiterate that the product needs to be manufactured to exact specifications to sell. You can add that if all goes well, you will place a large order.
If there are many product details, it’s even more important to confirm and verify that the supplier understands all your specifications. Or else, you may be disappointed with product quality or incur price increases after production has begun. Right from the time you order a sample, set your expectations verbally and in your manufacturing agreement, covering the following:
- Product requirements (dimensions, colors, finish)
- Packaging requirements (size, shape, design, quality, labeling)
- On-site procedures and tests and/or sending a random sample to an offsite laboratory
If your product is subject to stringent regulatory standards, let the supplier know that you will run lab tests on the items. If the supplier refuses your order, you will immediately know that they cannot manufacture to the requirements you absolutely need. If the supplier increases their quote, this can be a good sign indicating that they will pay attention to quality.
4. Having a hands-off working style
How you communicate with your supplier matters a great deal. Be respectful but firm. Chinese businesses have a centralized decision-making system and what the decision-maker says goes. If you’re remiss and don’t follow-up, your supplier will likely mimic your attitude! Keep them on their toes and demonstrate leadership with assertive communication.
Keep written correspondence as simple as possible. Use checklists and bulleted email messages rather than long paragraphs. Get feedback from the supplier via Skype or WeChat.
Limit the number of contact people from your side and theirs — ideally a SPOC from either party should negotiate throughout. It’s easier to build camaraderie and mutual understanding this way. Messages don’t have to get lost in translations and misunderstandings don’t have to occur. Avoid crippling the relationship when it has only just begun.
5. Not being reasonable about price and MOQs
Chinese manufacturers have thin margins, and are therefore rigid about minimum order quantities. They may be open to lowering MOQs only if you can promise a bigger order after your initial purchase. How you convey your commitment will also determine whether or not the supplier obliges.
New Amazon sellers may have a tougher time negotiating price and payment terms simply because their business is yet to take off. The framing of your email may convince the supplier to take a chance on you but only if your request doesn’t impair their ability to break even.
An example of an unconvincing email:
Hello Mr. Zhao,
“We’re setting up our online store on Amazon and yet to register our business. We would be interested in knowing if you could you could lower the MOQ requirement to 250 pieces as we’re on a small budget. We promise to purchase a large order once our business grows.”
Regards,
Miriam Smith
An effective email to the supplier can look like this:
Hello Mr. Zhao,
I’m the Purchasing Manager at [name of business] in Louisville, Kentucky. We’re interested in continued business with a manufacturer in China for our ecommerce store. Before we place a larger order, we would like to start with a trial order of 300 pieces.
Regards,
Miriam Smith
Price matches quality. It is crucial you set a reasonable target price before arriving at the negotiating table. It helps to understand that the supplier is a business and needs to make a profit too. Driving a hard bargain can sour your relationship but more likely, it could negatively show up in the quality or overall service.
Request quotes from multiple suppliers to understand the actual manufacturer’s price for the product. Look up the purchase price index for raw materials. This information is helpful when the supplier changes the price later on, which is a common symptom of fluctuations in raw material costs.
What does the price quotation include? A checklist of the scope of work is handy in determining the overall value provided by the supplier. Other than quality control, packaging, test reporting and after-sales service; the cost of certification required for the export, tooling and other aspects will also factor into the price. The supplier may include a safety margin to cover any risk of misunderstanding the scope of work or they could apply a discount on your next order.
6. Not performing pre-shipment inspection
The purpose of pre-shipment inspection is to confirm the quantity and quality of items when production is about 80% complete. If there are defects or non-compliance, this can be caught and appropriate corrective measures taken.
A third-party inspection service inspects random items from all batches of your order. The company needs to have a checklist of things to look over and know what the acceptable standards are for your business.
Do your due diligence when choosing a pre-shipment agency. There are agencies that may not intend to meet the ethical obligations of their job, especially when there are perks, incentives and gifts awaiting them from the supplier’s side.
Setting the right expectations and getting proper acknowledgment of these from the inspection agency is important to ensure they work in your best interests. This is because most third-party agencies will minimize or refuse liability when the inspection hasn’t been done properly. So, if you receive a large batch with shoddy packaging or incorrect dimensions, the purpose of retaining that agency is pointless.
There is an increased demand from buyers sourcing from China to work with sourcing agents that provide oversight over quality control, which is a part of their comprehensive end-to-end support. It includes a factory audit, quality checks at different stages of the production process, and pre-shipment inspection. Multiple levels of inspections greatly reduce the risk of sub-standard shipments. As suppliers are aware that their work is being scrutinized by an independent third-party, they are more dutiful about adhering to your requirements.
7. Not drafting an air-tight manufacturing agreement
Your manufacturing agreement should not leave any room for doubt or ambiguity when it comes to the scope of engagement and spells out the exact manufacturing requirements for your product. The manufacturer’s obligations need to be clearly and explicitly stated in your manufacturing contract.
The more detailed your contract, the better your will fare a favorable outcome in the event of a supplier dispute. This includes the product specification, the acceptable and unacceptable limits of the manufactured product, and evidence that you’ve paid the supplier. You should ensure your supplier should have tangible, documented assets and they must be located in the jurisdiction mentioned in the contract. If in the event you find yourself in Chinese court, as judgements in western courts aren’t enforced in China, following this advice will give you an upper hand.
You need a Non-Disclosure, Non-Use And Non-Circumvention agreement (NNN) agreement that protects your intellectual property and safeguards against the risk of your supplier making your products and selling them to your target market at a lower price.
The contract must be written in Chinese and be governed by Chinese law. It should allow for an alternative dispute resolution mechanism. Contract interpretation will depend on the party that has created the agreement. If your attorney has drawn up the agreement, the laws of your country will govern it and an agreement prepared by your supplier will be interpreted in accordance with Chinese laws. Do take note, a non-disclosure agreement is not enforceable in China.
In summary
Negotiations with Chinese suppliers can take a few weeks to a few months. Knowing what you’re in for can help you make the right moves and enter into a deal that provides a solid bedrock for your fledgling business.
