Strategic China product sourcing – Make sure you cover all aspects of your sourcing needs before pulling the trigger on your China sourcing efforts.
By definition, strategic sourcing means leveraging supply channels at the lowest total cost. It is widely acknowledged that China’s manufacturers offer a huge cost advantage to importers everywhere; especially in the west. For solo entrepreneurs and Amazon sellers, planning and implementing a China sourcing strategy calls for significant mental and physical efforts. Data collection, spend analysis, market research, supplier outreach and negotiating can all become even more complex given the greater geographical distances, particularly when you factor in both cultural and language barriers.
This post covers a few of the key aspects of sourcing from China that entrepreneurs should know and plan for.
Profiling the product you want to sell, and the present and future spend associated with sourcing it is a logical first step. The size, shape, design, grade, specification and other aspects of the product will influence your sourcing decisions, as will the cost to manufacture and ship the product to your country. Document this data before you begin your search for a China supplier.
Surveying the vast China supply market can be a challenge for importers that have no experience doing business in the country. Online supplier directories like Alibaba, Global Sources and Made in China can simplify the search for suppliers. During the time of selecting your factory, it is always helpful to have a broad view of China’s numerous manufacturing regions, the various trade dynamics, the cost of manufacturing labor per hour, and also to account for any unknown factors that could disrupt production.
Questions to ask:
This understanding will allow you to refine your search for suppliers. As discussed below, you will know exactly what to search for online, or who to meet in-person at the Canton Fair.
Contact suppliers either online or visit them in person at the massive Canton Fair in Guangzhou, where thousands of manufacturers and suppliers congregate twice a year. Either way be mindful of the realities of interacting with Chinese suppliers. Here are some tips:
It is most likely that you don’t know Mandarin Chinese and your supplier won’t be fluent in English. Hiring a translator during your first in-person meeting with the supplier will ensure smoother communication. The manager at the factory will understand your requirements best if they are conveyed in his language.
Factory representatives at trade fairs usually only know basic English and won’t be able to answer questions beyond what they’ve been trained to say. Here too, a translator can help you screen suppliers most efficiently.
Regulatory requirements differ by country and product category. Meeting applicable standards and labeling requirements is critical to avoid legal hassles after your product has gone out to customers. This is also important when your products pass through the U.S. Customs as your shipment could be randomly selected to undergo an inspection. If there are any issues, your shipment will be halted.
Here is a brief overview of the labeling, quality and safety requirements for products sold in the United States:
From your end prepare digital files for label printing and send them to your supplier. It is as simple as creating a label file in an .ai or .eps format. Select an accredited product testing company in China that will provide you with a lab report. You will need this when requested to submit proof of compliance.
Shipping terms or Incoterms (International Commercial Terms) determine which party is responsible for shipment. They lay out the costs, risks and responsibilities of freight in the sourcing arrangement. They include the seller’s and buyer’s obligations, who handles transport and to what point, who manages insurance and permits, and at what point in the journey are the risks of either damage or loss of goods transferred from seller to buyer. The Incoterms must be stated on the proforma invoice or quote sheet.
Ex Works (EXW) and Free on Board (FOB) are the two Incoterms used for international shipping. Under FOB terms, the seller handles all costs involved in delivery up until your order has been loaded onto a vessel at the designated port. After this point, the buyer assumes responsibility for any risks or costs of damage to/loss of goods during onward shipment. EXW makes you liable for all transportation costs but it is less commonly used because in most cases it is difficult to determine these costs at the beginning.
FOB/EXW is needed to compute the landed cost, which is the total cost of the shipment. It includes the cost of the product, logistics fees, brokerage fee, inspection charges, packing and crate costs, customs duties, insurance, taxes, tariffs, bank charges, and currency conversions. As the landed cost will impact your margins, calculate as much of it in advance as possible. If it is higher than estimated, explore options to lower it. Estimates from different suppliers and talking to other importers will help you gauge how much to pay.
The contract you sign with your supplier is your safety net when things don’t go as expected. Take into consideration defective products, missing specifications, late delivery; cover your bases for anything that can disrupt your business. You can point to your contract to show what was agreed upon, and the supplier will have to rectify it.
Do you need to draft a purchase agreement even if for a small order value? Many suppliers don’t have agreements in place for very small orders because their risk is small. The disadvantage is yours if the supplier saddles you with poor quality or extra costs. It is in your best interests to establish specific terms. This includes determining how each situation is to be addressed.
For instance, if 30% of your products fail inspection, the supplier will have to pay for re-inspection. Additionally, you should stipulate whether they will pay your inspection agency directly or will you have the option to deduct that cost from your balance due.
Your emails to the supplier should also be specific. Here are a few common instructions:
You may have mentioned these details during your call, in-person meeting and in your contract. It is important to not overlook including specific details in your emails as doing so limits opportunities for the supplier to try and say that you weren’t clear or specific.
An increase in price after production has begun typically occurs due to three reasons: a hike in labor costs, rising raw material costs, or an appreciation in RMB against USD.
Since 2003, China’s unit labor costs have grown relative to U.S. unit labor costs. Yet, they remain comparatively low against other low-cost manufacturing destinations. Better work opportunities can lure factory workers away from their current employer. Workers that invest in education and training may switch to desk jobs rather than working all their lives on the factory floor. To deal with a labor crunch, factories may travel to a different province to hire workers and pass on the associated cost to you. If your supplier uses labor cost as a reason to keep increasing prices, you should try to switch to a supplier whose processes and technology investments are in place to help minimize this risk.
Fluctuations in the costs of raw materials are beyond your supplier’s control. But beware – Chinese suppliers are known to use this excuse to pad up their profit margins. Take it upon yourself to research commodity prices online and see the historical costs of the primary raw materials used to make your product. You may need to be a paying member on a reliable website that offers accurate data on raw material prices. It is worth the fee if it provides the needed data to confirm or challenge the authenticity of subsequent price claims.
If no price change has occurred, take the matter up with your supplier. The supplier’s price increase may be much higher than the actual upward spiral in the raw material cost. In this case, make sure you negotiate a smaller price increase.
A weaker Renminbi makes Chinese manufacturers more competitive, which can help buyers secure lower prices. On the other hand, a rally in the Chinese Yuan can spell bad news for you as it will almost always translate to an upward adjustment in price. Your hands are tied and you will have to accept the price.
You can establish terms that protect against big price fluctuations. A common one is asking the supplier to provide a validity of the quoted price. The “valid until” period can be as short as 90 days, or can extend to more than a year for large orders. Negotiating a validity of 180 days is safe for you and acceptable to suppliers.
Re-orders and the assurance of a long-term partnership can convince your supplier to apply the previous order price to your current order, and then apply the increase on your next order. You could also include a minimum validity of prices and/or a discount on your next large order. Another tactic is adding a price limiter in your contract that prohibits sharp price increases over a longer term.
A strong relationship with your supplier works in your favor during price negotiations and in the event of issues with product quality. It may help you gain priority status over other customers and special favors that could make a difference to your business.
Chinese business culture is anchored in social interactions and mutual understanding. Inquiring after your supplier from time to time goes a long way. An annual visit to China to meet decision-makers and sales staff can keep one-on-one relationships strong.
At the core, your relationship is transactional. Loyalty to your supplier, not haggling on price, and incentives to encourage the factory to perform, can be a huge win-win in the long term.
You don’t have to! If you need to be more hands-on with marketing or other strategic aspects of your business, a China sourcing agent can shoulder every aspect of procurement. Sourcing Allies has been helping importers in the United States and Europe manufacture from low-cost regions since 2006. Talk to us to learn about how we can help you obtain the perfect partnerships that will enable you to work successfully with Chinese manufacturers.
Sourcing Allies is a team of expert China sourcing agents that has helped western customers manufacture and source products from low-cost regions since 2006.
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