Small importers face many challenges in China (see 10 hard truths for small buyers in China). Yet they can’t resist the attraction of very low prices–compared with what they have to pay wholesalers in their country. I seriously think many small buyers would be better off purchasing domestically. It depends on their organization.

Some of them consolidate their procurements in 1 or 2 small factories and can manage to get reasonable prices and (most of the time) acceptable quality. Others purchase many different product lines and spread their quantities across many suppliers–in that case, they need to be VERY tolerant about timing and quality.

I got many small importers on the phone, and they usually describe all the problems they have to face with their Chinese suppliers. I seldom dare to ask them “why are you buying here in the first place?”, but it is clear that some of these folks are not going to make much margin with their China projects.

I just came upon an interesting Q&A on this topic in the latest issue of the China Sourcing Information Center:

Q. My quantities are small, so how do I get good prices from Chinese suppliers?

A. You don’t. There are reasons for being in China, and small quantities are NOT one of them. If you are not buying as much as your current domestic distributor (or will soon be buying these quantities) you are probably not ready to be in China. Just because you know you can get things cheap still doesn’t mean that it’s right for you. China is best for millions of the same thing- not hundreds of different things. Even if your product items are of a large dollar value (hundreds of US dollars per piece) you are probably still better off buying from a domestic distributor rather than from a Chinese supplier.

Further, because you are getting lower costs you need to understand that there is a trade off in a lack of oversight/Quality Control (QC) as well as logistics and importing responsibility. If you are buying small quantities and you can’t afford to do some of the QC and shipping/importing yourself then you shouldn’t be buying in China.

I would say, it is possible to get low FOB prices from a “small” factory (less than 400 workers), but it is very difficult to get consistently low total prices (including freight, duties, the occasional quality/timing accident, and miscellaneous costs).

One of my friends has a small trading company in Hong Kong. Thanks to his network contacts, he got some steady orders from large institution such as the French police forces and some mail order companies.

Most of his customers don’t have any product knowledge. All they do is choose a sample, the color, and the sizes. They are focused on the labeling and the packing though, because that’s what might make their lives difficult.

The deal is simple: “here is an idea of what we want, we need you to deliver the goods in our warehouse”. They don’t want any question about the fabrics to use or the stitching job. It wastes their time, and they don’t even know how to respond.

So the intermediary’s job is to use his own common sense and take all the decisions. That’s why they want to work with a salesperson from their own country. It saves them headaches.

The problem is, one day a bad decision will be made. How can the intermediary guess everything right, from his external point of view? And in that case, arguments can quickly escalate. The intermediary says “but you never said you didn’t want this”, and the buyer says “it is obvious, how can you get it wrong?”

The solution for working smoothly with that type of customers is probably to develop a good personal relationship. It often comes down to paying nice dinners and putting girls in the purchaser’s bed. Business is business, they say…

I had a nice meeting with a potential client today. They import products from China into France, for two stable customers. We got to talk about liability insurance.

Wikipedia describes it as “a part of the general insurance system of risk financing to protect the purchaser (the “insured”) from the risks of liabilities imposed by lawsuits and similar claims.”

The manager explained to me that they buy large quantities of very cheap electrical products, such as watches or razors, for about US$1.00 FOB. She has a liability insurance policy covering these goods. It makes sense, since the potential damages are quite high (if some users get harmed by defective products).
She told me it was harder and harder to get this type of policy. Insurance companies are afraid of high claims, so they are not really interested in that type of business.

Just to clarify: this type of insurance policy can protect an importer from getting buried under millions of dollars of claims. But it does not help in any way if the buyer receives junk that cannot be sold at all (in that case the whole order is lost). And it does not help to regain the trust of domestic resellers/retailers.

As usual, I would argue that the most important is to catch issues upstream, at the design stage or at least at the production stage. When the products are on the market, everything is more expensive. See the 1:10:100 rule.

Has anybody got some experience with liability insurance for importers?

If you have found Chinese suppliers that you can rely on, you should make sure they like you. I am not saying that you should become “good buddies who go to parties together” (don’t do it!), but it is good business practice to do certain favors.

An easy relationship with the salesperson and/or sales manager who follows your orders can help smoothen small issues (e.g. production difficulties, price hikes from sub-suppliers…). Conversely, in an adversarial relationship, these same small issues can quickly escalate into major obstacles.

One of the best perks you can find, to motivate your supplier’s contact persons, is to invite them to your office. The Chinese (with the exception, it seems, of Shanghai residents) usually love to discover other countries. It gives them something unique to tell their friends–it gives them a special status.

They will probably need a visa (see this interesting comparison of countries on The Economist that I found in my Twitter stream), so you will have to prepare a convincing letter of invitation. About 95% of the paperwork will be done by their side, or course.

They should probably pay the plane ticket, but you’d better pay their expenses once they are in your country (in their eyes, you are the guest).

What should you show them?

• Your office and your key people. (If you want to look bigger, get some more people in for the occasion–companies do it all the time in China!)
• Any place of “special interest”, as they like to say. This way they will have a story to tell their friends. They will take hundreds of photos of themselves.
• Places with lots of people. They usually like to watch local people and beautiful girls. My Greek client took a supplier on an expensive island (Mikonos), in a location with few people and lots of gays. It was not a success…

What should you NOT show them?

• Anything related to your customers. Hide the files with customer names, for instance.
• Any repacking/relabeling that you do in-house, if it gives them information about your pricing or your customers.
• Any finishing/assembly that you do in your country, if it gives them information about the use of the complete product.

Josh Green, the CEO of Panjiva, came up with a thoughtful article entitled Spread The Word: There Isn’t A ‘Next China’.

Manufacturing products in China is going to get more expensive over time. For many importers who survive with a 5% or a 10% net margin, it means their business has to evolve of die.

There have been three ingredients to China’s success: pro-trade government policy, solid infrastructure, and a huge, underemployed labor pool.

It is this last ingredient — China’s huge labor pool — that has kept manufacturing costs so low for so long.

While the speed of change is breathtaking, the fact that things are changing is not a surprise to most sourcing executives, who have seen the writing on the wall for years.

Many buyers are looking at their options in other countries: Vietnam, India, Indonesia, etc. But it won’t be that simple:

The bad news: there is no “Next China,” because there is no country in the world that has [the above-mentioned] three key ingredients.

This is so true. I see the opening of China to export manufacturing as a historical exception. The World’s most populous country was entirely closed, then opened up pretty fast and did all the right moves to attract foreign buyers. Don’t expect that to happen again in your lifetime…

So, what should buyers do? Green’s response is to plan for it internally, and to make operations & supply chain more efficient.

Actually there might be a “Next China”, if transport costs keep rising: it will be the US and Europe! It seems like a “reshoring movement” is emerging:

A small but growing band of U.S. manufacturers — including giants such as General Electric (GE), NCR (NCR) and Caterpillar (CAT)— are turning the seemingly inexorable offshoring movement on its head, bringing some production to the U.S. from far-flung locations such as China.

Chinese wages and shipping costs have risen sharply in the past few years while U.S. salaries have stayed flat, or in some cases, fallen in the recession. Meanwhile, U.S. manufacturers have been frustrated by the sometimes poor quality of goods made by foreign contractors, theft of their intellectual property and long product-delivery cycles that make them less responsive to customer demand.

Finding a suitable Chinese supplier involves a process consisting of several steps, one of which is often an audit of the manufacturing facilities.

But how to audit a factory? Some buyers tour the plants themselves, while others delegate this job to a third-party QC firm. For those who want to do it professionally, Andrew Reich came up with a very detailed article about what is usually checked during a factory audit in China.

Now, a few words of caution about audits. Some importers rely disproportionately on factory audits, since it looks scientific (a score is generally given to each plant). But it is not a good idea.

My point is that the findings of factory audits might push you in the arms of a Chinese supplier that is not suitable for your company.

One of Andrew’s points is critically important, and I would like to elaborate on it:

There are a lot of mega-size and relatively professional factories in China these days. Keep in mind that just because a factory has the most modern facilities and staff that speak great English doesn’t mean that they are the right fit for you.

Generally, large factories tend to pass such audits more easily than small workshops. There are mainly two reasons for this.

• First, their growth has forced them to move away from the “family business” model and to hire some professional managers.
• Second, they often work with large buyers who have encouraged them to reorganize according to standards such as the ISO 9,000 series… Upon which are based most factory audit checklists. No wonder they get better evaluations!

But is it always a good idea to purchase from a very large Chinese factory? I don’t think so. A number of considerations should guide the search for a suitable Chinese supplier:

1. Significance

If your orders take up only 1% of the factory’s capacity, you will always be the last priority. You will suffer delays as soon as another customer pushes for a faster delivery.

Even if you are honest about your volumes, they will not say no. They want your business. But don’t think you will have any weight.

By the way, some Chinese suppliers grow very, very fast. You might represent 15% of their work one year, and only 5% three years after.

2. Internal competencies

Certain things are not included in usual audit checklists. In particular, buyers should wonder “how do their other customers work with them, and are they used to my way of working?”

Here are a few examples:

• Do they handle new product developments, or can they only copy a sample? This will impact what kind of product you can have them produce.
• Are they organized to purchase the materials? In the apparel industry, for example, many workshops sell under CMT terms, and are not used to managing the complexity of all the fabrics and accessories needed for production.
• Do they usually pack their goods themselves and organize shipments? Some Japanese importers don’t let the factories deal with this, since they prefer to check 100% of the products in a third-party warehouse before packing.

3. Seasonality

Importers should try to avoid their suppliers’ busiest production time. Timing pressure leads to poor quality and frequent delays.

For example, if you buy grills all year long, make sure you don’t place orders in a factory that produces barbecues 5 months a year and then closes the rest of the time.

4. Intellectual property risks

Large manufacturers tend to be better at protecting their client’s IP. But, on the other hand, they might already be present on your market (i.e. they sell to some of your competitors who see your developments when they visit the production lines or the showroom).

So it is a good idea to ask questions about the factory’s direct and indirect customers, but it is not enough. You should also spend a little time asking questions about samples in the showroom. You will see if the managers are eager to sell other importers’ designs to you.

5. Focus on high volume or high quality?

A factory is not capable of producing some low-cost goods for some buyers, and some high quality products for other customers. It would create lots of confusion and hidden costs. So they have to focus on one strategy. This is an extremely important piece of information, and unfortunately most audit reports do not include it.

Third-party auditors generally don’t have in-depth experience in the production of your product. They have no clue if the machinery is adapted to your production, if the operators are precise enough for your quality expectations, or if your standard is different from that of the factory’s current customers.

6. Intermediaries

Everything I wrote above is about the factory. But finding a suitable Chinese supplier also involves some questions about the nature of the supplier company.

Is it a trading company? Is it a manufacturer? Different importers have different preferences because of their own past experiences. Once again, an art more than a science.

If you work with several Chinese suppliers, and if you regularly switch to new ones, you will have to deal with production problems. It might be a factory refusing to rework substandard goods, or an unacceptable delay, or simply a project that comes to a full stop without warning.

Here are 7 pieces of advice for importers that are in such a situation.

1. Show that you are ready to walk away

The favorite strategy of Chinese factories that don’t want to correct problems is… to wait. And wait. Until their customer (who needs to deliver his own customers) must let them ship.

So the first thing to do is to give them the feeling that you’d rather cancel the order (and lose your deposit, if you wired some cash before shipment) rather than receiving products that can’t be sold at all on your market.

The second step is to try to understand the real reason of the problems, and help the factory. Tell them what you can accept, ask them to confirm that they can do it, and then tell them that it is a limit that you won’t allow them to break.

2. Have somebody on site

How do you really know what is going on? By sending someone (either an inspector, or a local agent) in the factory.

And how do you unlock a bad situation? Having someone on site definitely helps. Phone calls and emails to a salesperson will leave you frustrated and apprehensive. In China, delicate business conversations should be face-to-face with a manager.

You need someone who protects your interests on site. And a few hours are not enough (I was told “sorry, our boss is out so we can’t decide anything now” too many times)–it might take several days.

My clients sometimes ask me to go in a factory and talk to a manager on their behalf. I often have to describe the whole situation to the boss, who is not aware of it. It is an important first step. Then I try to find a solution that everybody can agree on (and that means many phone calls to the buyer along the way: it takes time!).

3. Don’t get emotional. Be curious.

Don’t piss the factory people off. Sure, there are at fault. But you will need their help. Bad manners and threats won’t help.

If they stalled halfway trough your production, or after substandard quality was detected, there is a reason. Here are the three most common types of issues:

-1- They are giving priority to another customer who is bigger than you… or who is better at defending his interests. You will have to guess by yourself. Once again, having someone on site helps–you can see what is on the lines and understand the situation.

-2- They have a technical problem that prevents them from producing your order, and they tell you it is impossible. If you have some technical experience, you might be able to help you.

In some cases it is simply a matter of common sense. For example, this week I sent a technician to see why a factory could not press a plastic label properly on the product. She used different temperatures and timings, and she found a solution after 5 tests. It took less than an hour. Sometimes we wonder “why didn’t the factory do this?”

-3- They think your conditions/penalties are not fair (for example you ask them to pay for air freight when they are “only” ten days late).

You will know right away if you are in this situation: they will tell you clearly. It requires a negotiation. The better prepared you are, the easier it will be.

4. Monitor progress closely

Finding a solution, shaking hands and going away are not enough. You should agree on precise steps, and then ensure that they are taken.

If the factory is not moving in the right direction for a few days, you know you are in trouble. You should immediately contact them, and send someone there again if are not given a good explanation.

5. Check quality before shipment

Even if your orders are quite small and you usually don’t control quality, this is the time to do so. A factory that is not happy about you, or that had to rush production, cannot be counted on to deliver perfect products.

If quality problems were noticed, you should impose a re-inspection. But before that, the factory should propose a way to improve the situation. Here are the issues to have in mind, and here is a simple chart of the process.

If the factory is really doing nothing, take the lead and send inspectors for a 100% check. In this case, only what is good can be shipped out. It can be expensive, but not as much as sorting the goods by yourself in your country.

6. Stop giving them orders until problems are solved

This might sound like common sense, but many importers have no alternative. When their own customers ask for more products, they send new POs to the factory they are arguing with. Why? Because they don’t know any other qualified manufacturer. It sends the wrong signal to the factory!

In general, importers tend to hope that the situation will get back to normal soon, even when red flags are multiplying. Then they get really upset when things are unmanageable. This is way too late! Walking away suddenly from a supplier can incur large losses for an importer.

7. How to prevent this type of situation in the future

Most efforts should take place earlier in the production cycle. Here are a few suggestions:

• Avoid giving large orders to a first-time supplier, and increase business slowly (sometimes there is only a certain level of work that they can keep up with, and anything above that level will not be followed properly).
• Set up a clear quality standard, and keep referring to it when the supplier asks questions or when you notice some issues.
• Follow production closely with quality inspections, if possible both during production and before shipment.
• Hold at least some of the payment until the quality of final products and the production status are verified. Paying by LC is safer with new suppliers.
• If you cannot afford to cancel orders (maybe you have already sold the products on your market), you should cultivate a back-up factory. It can be in China, or in your country (in which case production and delivery can be faster).
• Keep 2 or 3 weeks of safety in your schedule. Production problems regularly happen in China. Getting a back-up manufacturer up to speed takes time. Plan for it!

Any other tips, anyone?

Photo credit: wstera2

I just found a good article on the China Works Blog, about the risks of asking the factory to shorten lead times. It seems to be a beginner’s mistake, because importers quickly learn that pushing for faster production is not compatible with high product quality. But this is a good reminder for experienced buyers:

In our experience shortening production times is the primary cause of project failure, potentially resulting in corners cut and worse still giving the factory a comeback if the goods aren’t up to scratch – “you asked us to get these done in 2 weeks, instead of the 4 weeks we originally asked for….”

There are two ways a buyer can make this mistake:

1. Push the factory to reduce their normal production cycle time

Here is the way it usually happens:

Day 0:

Buyer: if you can make this product and ship it in 25 days, we can give you this order. You have already produced it, so there is no development work.

Supplier: 2 weeks only? OK, we’ll do what we can, but we are not 100% sure we can do a good job.

Buyer: if you really try and if you give me the priority, I am sure you can. If not, it’s fine, forget about this order.

Supplier: OK, OK. We’ll do it.

Day 15:

Buyer: so, you are getting nearly ready to ship, right?

Supplier: well, we are still waiting for some materials, and we’ll start production as soon as we get them. Don’t worry, it will be fast.

Day 20:

Buyer: so, production is already done, right?

Supplier: we are still waiting for 1 component, but we have reserved 2 production lines for you, don’t worry. By the way, I am afraid we won’t have time to send you production samples and wait for your approval. It would delay shipment.

Buyer: hmmm… it’s OK, please ship ASAP.

Day 25:

Buyer: you are getting late! what happens?

Supplier: we are rushing to get is all done by tomorrow night, and then we’ll ship it out. By the way, I am afraid we won’t have time for the final inspection that you usually ask for.

Buyer: hmmm… it’s OK, please ship ASAP.

Upon delivery:

Buyer: hey, what is that crap that you shipped to me???? I can’t deliver it to my customer, who will be really pissed off by the last-minute cancellation!

Supplier: but we managed to produce it much faster than usual, that’s what you asked for, right?

Buyer: of course I wanted the same quality, or I can’t do anything with it!! What were you thinking? Now please re-produce it nicely at your costs.

Supplier: look, we gave priority to your production, and we had to rush because you were in such a hurry. In these conditions, quality always suffers. You should know that. You even accepted to forget about production samples and QC inspections, so we thought the only thing that mattered was speed.

———————

Pushing the factory to rush production just does not work… The operators are less precise, quality control is barely done and there is not time to re-work defective goods. The workmanship is always worse in such cases.

2. Accept the shipment date proposed by the factory, and give no flexibility

Many experienced buyers keep about 2 weeks of flexibility in their schedule. Problems often emerge during production, but over-optimistic Chinese factories never include them in their planning. The bottom line is, delays happen–there is no way to prevent them all the time.

But some importers are not flexible at all, and it creates all sorts of problems. Here is an example:

Before PO issuance:

Buyer: if I give you the order before the weekend, when can you ship out?

Supplier: ETD (shipment date) can be on or before 15 Sept.

Buyer: all right.

ETD – 5 weeks:

Buyer: please hurry up to get a perfect sample approved, the shipment date is coming up soon!

Supplier: We are sending it at the end of the week. You changed some specs, so it takes us longer.

ETD – 4 weeks:

Buyer: sample is OK, please produce!

Supplier: thanks, we’ll try our best to produce and ship in time but the material suppliers tell me they are very busy.

Buyer: look, you committed to an ETD on 15 Sept., so now please deliver on time. If not, you’ll have to pay air freight.

ETD – 2 weeks:

Buyer: production is nearly done, right?

Supplier: no, we are very busy, and also the materials are arriving late. I am afraid the ETD will have to be 1 week later.

Buyer: no way, you promised to ship on 15 Sept., and you knew I was in a hurry.

ETD – 1 week:

Supplier: we will ship out in 10 days, but it really cannot be any earlier. Please help us, thanks for your kind understanding!

Buyer: I am afraid I don’t understand. If you don’t catch the boat for an ETD on or before 15 Sept., you ship the whole quantity by plane.

Supplier: I talked with my manager, Mr. Zhou, who thinks it is not reasonable. You cannot ask us to pay for air freight because we are only 1 week late. Please negotiate with your customer, thank you for your kind help!

Buyer: my customer will not accept the goods if they are 1 day late. They were pretty clear about it. I can’t push the date back.

Supplier: but you should have told us about it at the beginning! We cannot work under these conditions, all our other customers are more flexible.

Buyer: you promised a date to me… How can I know that you don’t respect the dates you promise?? Now you have to bear the consequences of your poor organization.

Supplier: we wasted 10 days in development because you changed your requirements and we had to make another sample. Now we ask for 1 week of extension. Isn’t it reasonable?

Buyer: at that time, you should have warned me that ETD would be pushed back by 1 week. Now is definitely too late.

Original ETD date:

Buyer: hello! Is someone responding to me?? Are you going to ship by plane?

Supplier: no. If you keep asking for it, we prefer to cancel your order.

Buyer: what???  In that case, please wire my deposit back. And you are not allowed to sell these products to anybody else!

Supplier: we are sorry, but the deposit was already spent to purchase the materials. And don’t worry about the products, we won’t sell them on your market.

———————

In this case, the factory might have done a good job and refused to cut corners. But in the end the purchaser is also dissatisfied.

The key is in managing the expectations of the final buyer:

• If they want a product made and delivered in their warehouse in 3 weeks, they can’t get the China price. It is just not compatible.
• If they purchase from China, they have to build some flexibility in their supply chain, or it will continuously be disrupted.

I heard the following argument several times: “it is not the Chinese factory’s fault if they produced poor quality, if the buyer pushed the price to a point where costs were not even covered.” My feeling is that, in such cases, responsibility is shared.

On the buyer’s side

When you think about it, importers are risking dollars to earn pennies, so they should avoid playing games. A few buyers do it systematically and consciously, in which case they really deserve to receive goods that can’t be used or resold.

But, in most cases, importers push prices down because they don’t understand the risks they are running. It is an education problem.

Let’s take an example. A product costs $1.00 to manufacture. The supplier would accept to sell it for $1.05, but they ask for $1.20. The reason is that they expect buyers to negotiate the price down.

A first purchaser likes the product and buys it for $1.20 per piece. She missed an opportunity of 15c of margin per piece, but she will probably get good service and fair quality.

A second purchaser is more aggressive, and asks for 70c per piece, “take it or leave it”. After some discussion, the supplier agrees to the price. Why? Because they will make it for 50c and they will screw that buyer, who will have lost everything (not just 15c/pc) on this order.

On the supplier’s side

In the above example, a honest manufacturer should make the product for $1.00, whatever the price negotiated with the buyer, right? And they should reject all low-ball prices, right? Well, it is not that simple.

A Chinese factory has intense pressure to grow up fast. Every day they hear stories of other manufacturers that achieved impressive growth with aggressive tactics. The temptation to do the same is very strong to play the same game.

So importers should not count on a supplier’s ethical standards. Again, that’s mostly a lack of awareness.

But does it mean that a factory that takes shortcuts on the bill of materials and/or on the workmanship of the products is not at fault? Of course it is. There is no debate about it, in my mind.

But let’s forget about who is guilty. This concept is not helpful. What matters is how to avoid purchasing goods of substandard quality. The real problem is that many buyers do not take measures to keep the responsibility on their supplier’s shoulders.

Danny Coyle and Steven Weng just came up with a pretty good “Guide to manufacturing knitwear in China” (see part 1 and part 2), and I think their advice is applicable to buying any product here.

They make a list of steps for knitwear production, but they also point out the major opportunities for delay. And they give advice to avoid these production delays. I took the freedom to rewrite their article from my perspective:

Step 1: design and sample approvals

Get this done as early as possible, be clear and precise. Delays will usually come from the customer side.

If the factory really does not care about you (or about the trading company that you purchase from), it will also make the process longer.

Step 2: production by the sub-suppliers

This is not always obvious to buyers, but most Chinese factories they deal with only do the final assembly and the packaging. They have to purchase materials and components from other companies that have their own priorities.

If there is a busy season for production of your items in China, try hard to avoid it. If it is impossible, know that your supplier might not get the key inputs in time–especially if they have to be customized for your order or if you purchase small quantities.

You can purchase the materials yourself, but it has some downsides. Don’t do it unless you really need to control the materials/components.

Step 3: production by your own supplier

Once they get their inputs, you should be on their back regularly. You should check if they start working for you early and with enough workers/machines to finish your order in time.

There are mainly two ways to avoid delays at this stage:

• Have a regular presence in the factory. If you can’t be there yourself, send an inspector during production. The objectives are (1) to catch issues early and make sure the factory implements corrective actions, and (2) to get an idea of production status.
• Promise penalties for late shipment. Other buyers do it, so if you will have less weight than them if you don’t.

Step 4: finishing, inspection, packing, shipping

This is usually not a source of long delays, except in certain cases:

• The inspector finds some unacceptable issues, and the factory has to rework/reproduce the goods,
• The buyer appoints a supplier of labels who is late,
• The buyer wants to consolidate several shipments in one container, and waits for another supplier to be finished with his orders.

One last piece of advice

Experienced importers add a couple of weeks to the shipment date promised by their suppliers, in their own planning. They know that delays happen anyway!

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For more reading about ways to avoid delays:

Kelly’s 1st & 2nd Laws of China Sourcing, on the Passagemaker blog;

What can you do about late shipping?, by David Dayton;

Managing urgent shipments in China (published last year on this same blog).