When you're looking to source products from China, you have two options: buy from a wholesaler or directly from a factory. Both work differently. Paying a wholesaler means letting go of a part of your profit. But it is also a convenient way to source large quantities of different products quickly. China direct sourcing is safer because you work with the factory. On the other hand, finding a China factory and building a relationship with them requires time and effort.
Direct sourcing is a complicated set of activities involving decisions on finding suppliers, and managing quality and shipping. It requires hands-on order monitoring and quality supervision to avoid delays, regardless of the product or industry. Geographic distance and time zone differences add to the complexity. Without sufficient knowledge of the details, shipment delays and additional costs are more likely to be incurred.
Buying off-the-shelf products wholesale from a supplier is only slightly easier. But spending time on tactical and strategic details related to costs, quality and shipment aren't very different from that involved in China direct sourcing.
If you want a standard product of a high quality in bulk, a wholesaler on Alibaba should do nicely. How do you verify quality? On the supplier's page, check if they indicate that they can send a sample. Check the box to request yours. If they don't offer this option, request them for a sample via email.
When you want your product customised to your specifications or have a design drawing for a new variation of a product, it is better to work with a factory. Having a China wholesaler as a middleman means you will first need to explain your requirements to them, who will transfer the details to the factory. It creates unnecessary complications as wholesalers are usually not fluent in English and don't have deep knowledge of how the particular product is made.
All suppliers specify minimum order quantities (MOQs). You'll be able to find smaller MOQs on supplier directories. Large and established China factories tend to quote higher MOQs. Factories focus on acquiring clients that support their bottom line. And as they receive several requests a day, they're in a position to pick and choose as they wish. So, for wholesale China direct to work, a good wholesale quantity works in your favour.
You can negotiate smaller MOQs, with the assurance to place more orders if you're pleased with the first one. Generally though, it is a good practice to respect the supplier's MOQs.
Wholesalers have contacts with different factories and there is no knowing who they're buying from. A wholesaler may initially offer you a low price with decent quality, keeping their margin low. Once you start placing more orders, they may switch to another factory that makes the product at a lower cost but only because it uses cheaper raw materials. Suddenly, you see the quality deteriorating while the wholesaler makes a profit.
Even if honest, wholesalers have no control over quality. They may not pay attention to the quality of products as their main job is to match your requirements and procure items. So, if the factory is to blame, you will have to inform the wholesaler about the quality issue and hope that you get better products the next time.
Opting for China direct sourcing is the safer option as you're able to maintain oversight over quality better. You can talk directly with the sales representative, engineer or factory manager. You can also negotiate directly with the factory to fix defects or replace defective products.
With these points in mind, let's look further into the benefits you gain from working directly with a China factory.
A direct sourcing strategy works well and helps sustain long-term success for your Amazon business. Elements of a strong strategy include:
Building capabilities in manufacturing a certain type of product takes time. So, as much as possible, try to partner with a factory with proven abilities and credibility in making your product.
Working with manufacturers that meet ISO standards is imperative to ensure quality. Supplier screening and factory audits are done routinely. Conducting in-process quality inspections and actively communicating feedback on product quality are also important to satisfy your customers.
When done right, China direct sourcing saves money. A good handle on the factors that affect the final price of products help you make informed decisions. With the right manufacturing partner, building long-term relations comes naturally. This can make you eligible for volume discounts and other money-saving incentives.
As an importer interested in sourcing direct from a Chinese manufacturer, what functions can you expect to perform? Are some of these efforts on-going, and if so, feasible to handle by yourself? Here's a look.
A supplier background check entails many things. A careful evaluation is necessary to partner with the right manufacturer. The checks include:
• Company registration information: Company name, registration status, registration number, registered address, operating English name, export and import enterprise code, license expiry date, legal representative, changes to official company name, among others.
• Names of company directors and shareholders
• Site identification
• Company certifications and licenses: System certifications (ISO 9001 etc) and trademark
• Subsidiaries and branches
• Reputational and legal checks
Screening a Chinese supplier is difficult and time-consuming for western importers. You can hire a company offering supplier verification and background checks. Better yet, you can engage a sourcing agent for end-to-end sourcing services, which include RFIs and supplier qualification.
Need help finalising your product design or completing product specifications? Asking the factory for directions or telling them to use the same packaging materials they usually use for similar products is risky. You never know what you might end up with.
Product development is something you need to figure out after research and advice from other importers. If this is not possible, a sourcing agent can come into the picture to help you finalise product design and draft a solid specifications sheet to share with the manufacturer.
Relying entirely on the factory's quality control system is not recommended. The problem may not be with their processes or procedures, but with their understanding of your product requirements and quality standards. Quality that passed of as acceptable in China may be rejected in your market. So, keeping a tab on product quality is a key function.
You can pay a quality inspection agency to conduct the checks. They will compare the finished product against your specifications. Quality inspectors are knowledgeable and experienced in evaluating the quality of the products they specialise in. Sourcing agents also offer a quality inspection service, performing in-process checks and getting mistakes fixed proactively.
Firstly, novice importers need to know what the best payment methods are and how much to pay the supplier initially. Usually, letters of credit and wire transfers are the preferred payment methods when the relationship has just begun.
Avoid payment risks. For example, using Western Union is a bad idea as you're not protected if the factory scams you. In fact, it is the commonly requested method of payment by scamsters.
Never pay the manufacturer the full amount in one go. Make a downpayment (about 30%), pay 40% after the quality inspection and shipping, and the remaining 30% after the arrival of your shipment.
When a batch has more defective products than what you're ready to accept, you'll need to raise the matter with your supplier immediately. Solving the problem will entail answering questions such as whether the factory understood you requirements, quality inspection fell short of expectations, or the factory ignored your instructions. Making these deductions can be frustrating, with the language barrier adding further difficulties to your conversations with the manufacturer.
A sourcing agent can be helpful during such situations, serving as a go-between and making things clear to the manufacturer in the language they know best. Their ideas and advice can be especially helpful for new importers that lack experience negotiating with suppliers.
Sellers need to identify all the factors that add significantly to the overall cost of the product. The full cost of China direct sourcing includes these elements:
• Cost of raw materials and components
• Logistics costs
• Freight cost in procurement market
• Costs to ensure that delivered goods meet quality standards (ex: inspection agency fee)
• Management costs
• Costs arising from damage incurred during transportation
• Warehousing costs
If you're stepping into the importing world for the first time, learning about the most significant and least signficant cost savings in relation to your own country is useful. For example, most buyers report an average saving of 19-25% by using Free on Board (FOB) international commercial term (Incoterms). Under FOB delivery, no costs are incurred by the buyer until the point of shipment. Costs and risks are borne upon taking possession of the goods.
It is worth paying attention to logistics costs as they make up 8-15% of total sourcing costs. Just the shipping costs are the largest single line item, making up 8-10% of the total procurement cost. On average, logistics costs represent 12-15% of total sourcing costs. Additional costs of logistics, such as insurance, appraisal costs, warehousing, damages and management account for a third of total logistics costs.
The decision to switch suppliers may be due to varied factors. You may expand into new sub-categories that the manufacturer cannot help you with. A scaling up or down of business may necessitate you to add or subtract suppliers. When such a need arises, you'll need to plan conversations with existing suppliers and begin your search for a new manufacturing partner on the side.
This is easier when you have built strategic Chinese business contacts over time. You can reach out to your network for recommendations and advice. If you've hired a sourcing agent to manage end-to-end procurement, they can help you switch suppliers and make your current supplier understand your new needs better.
Amazon sellers, SMEs and large companies are able to improve the quality of products and delivery from Chinese factories through efficient supplier management. It allows them to keep overall costs of direct China sourcing low and build a sustainable relationship with suppliers based on trust.
Successful importers also have a habit in common: they critically review their sourcing activities from time to time, and explore additional cost-reduction potential in sourcing direct from Chinese factories. It includes evaluations such as, "Which markets are profitable for which products?'', "Which markets do we want to enter, and which do want to exit?", "With whom should we work in the sourcing market?", "Is there scope to improve our tax planning?", "Are our sourcing costs and outcomes aiding our strategic goals?", and "If our current plan does not work, do we have a Plan B?"
Large and medium-sized businesses buying from Chinese factories organise their sourcing in three main ways. About half of the businesses rely on in-house procurement managers on the ground in China. Many have purchasing staff working at subsidiaries or joint ventures, while a smaller percentage use commercial agents.
SMEs are less likely than their large peers to own subsidiaries in China. Smaller sourcing volumes make it less economically feasible to have an internal procurement staff. Independent commercial agents are economically viable to smaller businesses, and provide them a great deal of sourcing flexibility.
Maple Sourcing offers a full range of end-to-end China direct sourcing services, helping you procure straight from Chinese factories easily. Since 2012, our top-quality mass customisations at low price points, and professional English language service have been contributing to the success of Amazon sellers. For more on how you can benefit from engaging an independent sourcing agent, talk to us today.