How to Manage Risks when Sourcing from China?
Sourcing from China is with full of opportunities, however, with every opportunity there is always an element of risk and China is no exception. Much of the risk can be managed and here we will outline some of the most common mistakes that people make when sourcing products, so that you can avoid making them.
(1) Not defining specs
This may sound obvious, but a clear definition of your product is absolutely critical. Whether the product is cardboard packaging, homewares or sports equipment, a comprehensive product specification is the first step in ensuring you end up with a supplier and product that you are happy with. The more detail you provide a supplier with, the more accurate the end product will be.
(2) Not doing enough due diligence
Many people don’t investigate potential suppliers in enough detail. This can be a costly mistake as trade fairs, emails and phone calls can only reveal so much about the real capabilities of a supplier.
The first step in conducting due diligence is to request information such as business licenses and customer references. Further to this, visiting the factory will provide a clearer insight into their working conditions and capabilities. Whilst on a factory visit, it’s also possible to arrange interviews with management to understand the financial health of their operation.
(3) Focusing purely on price
It’s easy to get caught up in the price game. After all, the lower the price, the higher your potential profits. Price can certainly be an initial filter when shortlisting suppliers but relying on this can be a very costly mistake in the long term. Low prices almost always come with other compromises, whether it be quality, reliability, communication or other things such as hazardous materials.
It’s important to be price conscious but letting this rule your decision-making can be the downfall of your product or business. Extremely low prices are often an indicator that a supplier should be avoided - if it seems too good to be true, it probably is.
(4) Not creating watertight contracts
Relying on verbal contracts and agreements is a very dangerous game. When sourcing products from China it’s important that you have everything in writing and create contracts with all parties. Standard contracts include the main items such as parties, terms and product definitions, but it’s important to have a legal professional assist you. This can make the difference between a contract that you think covers you and a contract that truly is watertight. Remember that different laws apply when doing business in a foreign country and navigating this on your own can be very difficult.
It’s becoming more commonly known that contracts themselves don’t always have as much standing in China as they do in the western world, but having the strongest possible contract is still the first line of defense.
(5) Not having a local contact
Doing business with other countries and other cultures can be fraught with danger and can at times be a logistical disaster waiting to happen. Having someone on the ground can help avoid costly mistakes. Such us a sourcing agent, this contact should speak Chinese and be able to assist with quality control inspections and any emergencies with logistics or manufacture. Many business owners believe they can handle the operation remotely but the value of having a specific contact on the ground cannot be underestimated.