Factory, Trader, Sourcing Company: Which is Better?
There are many commonly held beliefs in the west about getting a factory to manufacture your goods in China. It is true that you can vastly reduce your production costs, even when you have to ship products halfway around the world.
But it isn't true that dealing directly with factories is always the best way forward. Let me tell you the pros and cons of factory, trading company and sourcing company, so you may know which is right for you.
Factories are often seen as the best and only source for your goods. You can communicate your needs directly with them and, if they are the right factory for you, they will have a high level of expertise in the manufacturing process and you should be able to rely on this from order to delivery.
Factories will make your goods to your specifications and within the tolerances you demand. The factory you choose will have probably been making similar goods for some time – you wouldn't want a smart phone case factory to build the smart phone itself!
Finally, cost is frequently the main reason people go to factories direct as it is often thought that you will get the best price by that route (this isn't always the case, as will be discussed when we look at trading and sourcing companies below).
Where you have decided to go to a factory, you must be aware that in China it is quite common for trading companies to try to masquerade as manufacturers, and they often will try very hard to fake for as long as possible. Though there are good reasons to go for a trading company, particularly if they are upfront about being one, if you specifically want a manufacturer here are either ways to smoke them out:
Ask them outright if they are a trading company or a manufacturer. Often trading companies, particularly the ones you may wish to work with, will come out and say that they are immediately.
If they do say they are a factory, tell them you’d like to pay them a visit. Manufacturers will leap at the chance to show off their factory and try to set up a date to meet, where someone with something to hide may be evasive and not be too willing to let you pay them a visit.
Look at their product range. Manufacturers will tend to specialize in a much narrower range of goods according to their tooling and expertise. Trading companies will have a network of contacts so will have a far greater range of products on offer. Rather than investing their resources heavily in new lines, they can just pick up the phone to a specialist factory and get them to make the product.
Is their listed mailing address on the outskirts of a city or is it an office in the central business district? As with western cities, manufacturing areas tend to be on the outskirts where the land value is lower. A trading company however only needs an office and could well be in a central location of the city.
How much do they know about the production process? A factory boss will know his lines intimately and be able to give good answers to good questions. A trading company will give much vaguer answers. A very detailed knowledge of the product on your part will go some way to persuading them that you are a serious buyer as well.
Ask for a third-party factory audit. There are specialist auditors in China who will examine the contact’s claims and research the factory, as well as any certification they have, before you sign anything with them. A trading company might be evasive about this, as they would be reluctant to disclose their sources.
Trading companies are sometimes seen as an expensive and unreliable way of getting your product made. This is not always the case, and despite what you may have heard the trading company route may be the right one for you if your circumstances are a good fit.
One of the important differences between sourcing companies and trading companies is that trading companies will have a high level of expertise in a specific field. With multiple importers wanting similar goods, and a number of factories that make those goods, the trading company may well have a level of expertise that is close to that of the factory themselves. They may be able to advise you as to how to customize your product and improve its salability, which again could boost your bottom line when it comes to selling the product.
They will act as middle men. The good ones will have a number of contacts with factories in their region, and may well be able to get your product at a lower price per unit than going direct to a manufacturer because they will be able to achieve economies of scale as they can bolt your order on to an existing line of very similar goods. This is one of the strengths of going to a trading company – they can get a far lower price per unit than you might be able to at the scales you want to order.
One of the issues to look out for is that unlike sourcing companies, trading companies should be considered as being on the side of the factory should any dispute arise. They will be your point of contact at the factory – not the factory itself. They will often seek to protect their manufacturer’s interests; the lines of communication will be longer and disputes harder to resolve.
Sourcing companies, work on your behalf to source a manufacturer and deal with the issues that arise in China. Unlike trading companies their loyalty will be to you rather than the factory, so when a dispute arises they will represent your interests.
As with trading companies the sourcing company will have a number of existing relationships with factories. Though their position is more on your side of the line, they will deal with the same factories on a regular basis and like trading companies, will often be able to drive some economies of scale into the final cost per unit.
One of the main advantages the sourcing companies should have is their grip on quality control processes that can be applied to a great range of products. This should include contracts in Chinese, inspections, follow-up and putting together a QC system in place. They can ensure that your product matches the specifications you have set and tackle any disputes on your behalf.
Sourcing companies specialize in the supply chain (logistics) as much as the production process & understand international logistics as well as compliance requirements better in most cases. A good sourcing company should be able to take over your entire sourcing process, right from finding the factory, to Chinese contracts, inspections compliance and logistics to your door. This would allow you to focus on your sales & marketing operations through the significant time savings achieved. A trading company might be better at reducing the factory price per unit, but a sourcing company might be able to drive greater savings in your supply chain overall.
Which Type is Right for You?
So how do you decide whether you should be working with a factory, a trading company or a sourcing company?
This decision is unique to each importer and is based on several factors, such as:
Experience importing from China,
Knowledge of import regulations & processes,
Size of your order (Total order value, as well as order value per product and per supplier),
Resources available to manage the import process.
If you are a large buyer that can comfortably meet the factory’s MOQ, have a good knowledge of the import processes & compliance requirements and have the time & resources required to manage the back & forth communication and order follow-up with the supplier, including order follow-up, you may consider a factory.
If you have larger orders and can meet MOQ, but are short on experience, you can go to factory direct and still work with a sourcing company as your nominated representative on the ground to manage the operational process as well as your risk and quality requirements.
If you are looking to buy a wide range of “related products” within the same industry but your quantities are not large, a trading company can be a good option for you. Trading company’s specializing in a given industry would often develop a wide product range with their products being manufactured at several different factories, thereby giving you the choice to carry multiple products in the same niche and at the same time being able to import smaller quantities per product.
As above, you can also use a sourcing & QC company to manage your risks, due-diligence, project management, quality control and logistics requirements when working with a trading company.
Finally, you can use a sourcing company in most of the scenarios mentioned above, especially if your order QTY is not large and related to wide range of products. Sourcing companies are in a better position to find direct manufacturers and skip trading companies which often dominate B2B portals.
As sourcing, quality control & project management process is highly time-consuming and often requires presence on the ground (for example factory audits, inspections, manufacturing control, container loading, etc.), importers of all sizes often use a sourcing company to work on the entire sourcing process so they can focus on their sales & marketing endeavors.