The dynamics of business keep on changing due to several reasons and for the last 20 years, particularly direct sourcing has become a very dominant trend in most of the industries all over the world.
This can help reduce FOB price as by virtue of buying directly from the factory, you can get all the products at the wholesale price and you can eliminate the various margins that most of the trading companies may demand while procuring any kind of raw or finished materials.
This direct sourcing solution can not only help in reducing the overall cost of the importer, but also, they can be more competitive in the market when they will do further value addition to them. However, this needs serious hard work on part of the importer and also, they must work in a very professional manner.
If you look at the scenario of 15 years back, there existed hardly any direct sourcing solution and most companies of the world availed the help of trading companies who worked as an intermediary between the manufacturer of products and the consumer industries.
These trading companies imported the items on behalf of the consumer and then exported them. Usually, China used to be the main supplier of these produced goods and most of the traders mostly from Hong Kong based companies imported from China and then exported to the consumers.
None of these trading companies charged less than 20 percent as a trader margin and the consumer had to bear this additional cost. However, in this process, the trading company used to offer an additional service to do quality control and problem-solving of the products imported by them.
However, when the consumers preferred to go for the direct sourcing option then for them “cutting the middleman” was their main objective so that they can become more competitive in their business.
However, while going for such a direct sourcing solution, consumers did not realize that they also have to face a few additional challenges. They obviously did not anticipate that these trading companies were also doing the following functions while importing manufactured goods from China.
Since these trading companies were based in Hong Kong, they were much more aware of the local conditions.
By virtue of their proximity to China, they were also effective in the following functions:
These trading companies were using either any trusted network or through a certain scientific approval process, they used to match the specifications of the consumers and the suppliers of the product to ensure that they are importing the right product for the consumer.
Often there is a very big communication problem for any foreign consumers while dealing with Chinese manufacturers. Since China is not an English-speaking country, a consumer had to take the service of a young translator.
Often while looking for the direct sourcing solution in China, sending and again rechecking of samples will not only be frustrating, but quite time-consuming too. Hong Kong based trading companies had the advantage that they speak both English and Chinese and hence they used to do this job very efficiently.
Usually, most consumer companies don’t bother to specify clearly all their expectations. In 90% of the cases, it is necessary to specify what packaging materials will be needed while shipping the items.
It is very risky to rely completely on the factory that is manufacturing them and hence the better solution will be to pay additional money to a certain QC firm to clearly specify all these.
The consumers also need to take the services of certain agencies for third-party inspection. These agencies will use certain statistical tools to do proper quality control of the items manufactured in China. This could reduce the risk of rejection at the consumer’s end, and make sure quality standards are achieved.
While going for a direct sourcing solution probably this will be one of the most under-rated functions of a good intermediary. Whenever there arises any problem then the consumer cannot easily resolve the problem just by sending emails or phone calls. Traders could fill this gap easily.
Also, the consumers particularly if they are first-time buyers need to use either letter of credit or certain OEM and ODM agreements, while making payments as the business relationship is yet to build sufficient trust.
Therefore, any company in the world that is looking for a direct sourcing solution in China should keep all these above challenges in their mind before they get rid of the trading companies that have been charging additional charges to find whether they will remain competitive by going for direct sourcing solution.
Surely, many companies of the world are now interested to deal with Chinese manufacturers directly rather than taking the help of any traders from Hong Kong as the trader’s margin is seriously denting their profitability.
There are several benefits of the direct sourcing option that we will discuss in detail later, but you can see a direct saving of money as your FOB prices reduce drastically as compared to what you have been paying to traders.
The following are a few tips for consumers who have decided to start directly buying from China.
Don’t get excited by looking at the FOB price, as directly importing from China may involve several hidden costs. You have to develop a suitable algorithm to calculate your total landed cost which may include shipping charges and various other duties, etc. which may vary from country to country.
You cannot take the word of any untested supplier as gospel truth and from time to time you need to do a reality check. You need not however tell them that you do not trust them but tell them diplomatically that this is what my boss has asked me to check. You need to maintain a good professional relationship.
This is true not only for China but for any direct sourcing solutions Asia, you need to personally visit the country, and this the biggest secret of success factor. You must check their manufacturing process and see how they maintain their quality.
Most of the right suppliers will be already catering to the need of various foreign countries. Make sure that their specifications are similar to your requirements. Any right kind of supplier may neither be too small and nor too big.
The company must be quite well-organized as per their size and most of their top managers must be very excited to do business with you. If you meet any of these suppliers in any trade shows then you must have good sets of questions.
You should not be in haste to place a big order to any supplier, whose products you are yet to test. Neither must you try to make any big commitment either. You never know at this stage, how long will take to reach their shipment.
It is always a good practice to start your business by opening a letter of credit when you are going to place your first order. You must also add a margin of 3 to 5 weeks about their promised schedule.
If you find that your first order is not managed properly then you must change your supplier. However, if you are happy with their order execution then you may slowly increase the size of your order and check.
You must have good incoming quality checks and also must define a proper specification. Your sample approval must be done very carefully after careful inspection.
You must hire a person who has thorough technical knowledge about the product that you are buying and also knows the expectation of the market.
You must always start with a very small order, and then followed by another one, and till you get enough confidence about the product, and do not place a large order.
There can be many unknown factors that may sometimes fail any new industrial product and that may not work satisfactorily. If the rejection is very high then you must communicate with the supplier and unless you find the right solution, you should refrain from placing a bulk order.
If you have achieved the milestone of approving the small sample of products imported from China then you must proceed in the following manner:
While creating direct sourcing solutions Asia, you must develop not just a single vendor but at least 2 to 3 vendors. This will offer you enough flexibility and your production will not be interrupted due to any breakdown or any problem at the supplier’s end.
There can be a huge difference in prices as well as business terms and that varies based on the size of the company. Therefore, you must do enough research about the company with whom you are negotiating so that you have a win-win situation while negotiating the price.
One good part about China is that you can get multiple sources of similar products that offer you plenty of scope for negotiation. Therefore, you must do enough market survey.
Quality has always been an issue with the Chinese products, although they have come a long way by virtue of their mass production and the introduction of plenty of quality control measures by dealing with consumer's requirement all over the world.
One of the basic issues that arise is the understanding of the specifications. What is your understanding may not often be the same as that of your supplier? Therefore, while dealing with any Chinese supplier, you must have an extensive discussion on the basic specification and you must develop a common understanding.
Often it could be frustrating to find certain trivial issues that may suddenly crop from time to time. The worst is if the same remains unnoticed at the beginning. The people who are responsible to check the incoming quality of the product from China must be quite sensitive enough to raise the alarm.
Often the issue can be a common problem between both supplier and also consumer end. You must therefore create a task force who should be made responsible for raising the alarm.
Once you have established the quality of the product of your Chinese supplier then it is necessary to maintain a healthy professional relationship with your supplier. Once the mutual trust between the consumer and supplier is developed then any trivial issues can be quickly resolved mutually.
To build up a long-term business relationship, mutual trust will be necessary.
Many industries all over the world have recognized the tremendous manufacturing potential of China and feel that by importing directly from them will result in a significant cost reduction. These days, various brands are utilizing this opportunity, and as a result, the quality of Chinese products has also improved.
As the economy of most parts of the world has nosedived, most industries who are trying to source various industrial products find it extremely beneficial to source directly from China as their labour cost is pretty low.
The following are a few reasons why most companies all over the world have started looking at China as a cheaper source to import various industrial products.
You must understand that over the years, China has positioned itself as one of the largest economies in the world. Also, their economy is rapidly increasing and hence sourcing any products can always prove to be beneficial for a business owner.
If you are searching for a good supplier then sourcing from a Chinese company can offer you several options.
Another reason to prefer importing from China is that they have expanded enough of their supplier base. Today, China boasts as most diverse supplier base available in the world. Whether it is textile, electronics, or any consumer goods, you will find many sourcing companies that can make virtually any kind of product.
While sourcing any products from China, one can directly make a deal with the original manufacturer instead of going through any agents. You can always connect with any reputed supplier directly or through trade fairs or online itself.
You must, however, ensure that you hire an experienced and reliable manufacturer.
Labour cost is always an important factor to determine the overall cost of production in every manufacturing sector. Being the world’s largest populous country, China has the advantage of the availability of largest number of both skilled as well as unskilled labour forces.
Therefore, it is very easy to find a cheap source of labour in China and that helps significantly to reduce manufacturing costs.
While sourcing any products from China you need to keep your direct involvement to avoid any fraud risks, untimely delivery, and undue profits so that you may act upon them immediately.
Chinese products over the years had a very bad reputation for the low quality of products. Any Chinese products were considered as not durable. People used to call any Chinese product a use-and-throw-quality product.
However, over the years they have succeeded in removing that perception. Since they have started exporting to different advanced countries and as a result, they have also improved their quality system.
Language to communicate with Chinese manufacturers is also another big issue and therefore you will need a trusted person who can be an interpreter while communicating with them.
Also, the Chinese suppliers are gearing them up for this shortcoming and hiring people who can correctly answer all your queries.
With sourcing of Chinese products, you can personally visit their factories and check their actual working conditions. You have the freedom to select any company and have a discussion on your requirements.
You will find a good number of suppliers for any product that you want to source and hence there will be enough scope for your negotiating the price and the terms and conditions. However, you must be very clear about it as often language barrier can create a difference in understanding that leads to confusion.
Due to the competitive global market, all businesses need to focus on their profit margin by not compromising on the quality of the product or by raising production cost. That is one of the main reasons why many companies all across the globe prefer to source products from China.