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).

I already wrote about my feelings regarding 80%+ of Chinese trading companies. The most disturbing for QC inspectors is when an order is split among several factories. But the real loser, in this situation, is the importer.

Of course, sometimes it is necessary to split an order. Chinese manufacturers tend to make one type of product only. They cannot manage the complexity and the extra costs of having several types of processes for several lines of products.

But spreading production among 3 or 4 workshops, even though the products are nearly the same, is typical of Chinese intermediaries. And it is NOT a good sign for buyers.

The best strategy for outsourcing in China is usually pretty close to this:

• Find and qualify a couple a factories, select one for production and keep the other one for back up;
• Use all your weight (and contractual penalties) with the chosen manufacturer to get the attention of management and to be delivered without much delay;
• Spend time with the factory people to make sure they understand your expectations, and then watch production quality regularly during production and before shipment.

Now, what do some middlemen do? The exact opposite:

• They develop samples with whatever factory accepts to do it;
• Once you have given the greenlight for production, they give each separate reference to the workshop that quotes the best price;
• They don’t do any quality control, even though they tell you not to worry.

What are the consequences of spreading an importer’s order that thin?

Shipment is ALWAYS late, for three reasons. First, delays happen as soon as 1 factory is late. Second, no one maker cares much about this order. Third, the cheapest workshops usually get this type of business, and they are the least organized of all.

Quality also suffers, of course. A workshop that quoted a very low price, under no supervision, will usually produce in a rush and will not rework anything unless the importer sends his own inspectors.

Pricing is totally distorted, and is sometimes raised unexpectedly. The factories usually don’t count on repeat orders from local intermediaries–anyway, with a low enough price, they can always find another order. So they often play games and threaten to drop the order if price is not increased.

What can buyers do about it?

I suggest to make it clear from the beginning that the customer have to approve all factories (if possible, they should also audit them and qualify them). Then they can send an inspector when production is under way.

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.

If you work with several Chinese suppliers, you might have heard them complain about electricity shortages. You already heard about Chinese New Year, substandard quality, rogue factories… Here is one more risk in your supply chain!

Electricity shortages have different sources. For example, several Shenzhen factories blame the recent strong thunderstorms (we are right in the typhoon season). Heavy snow in the winter can have the same effect. But this is rather exceptional.

Shortages usually occur because of very hot weather, which (1) pushes offices and apartments to use more air conditioning, and (2) makes it more difficult for power plants to cool down. This is the reason why electricity was cut in several provinces over this past week.

In this case, the government resorts to rationing. Residential buildings have the priority, and industrial areas are “on and off”. Unfortunately, it seems like the shortage planning is not always clearly communicated. Factories are often surprised (or pretend to be).

So, why is this important for importers?

If you are on a very tight schedule, your supplier’s workshop might be unexpectedly out of power for 2 or 3 days in a row… And they might miss the closing date.

This past week, I had to reschedule about 30% of my firm’s inspections at the last moment because the factories’ operations had been totally disrupted. Many of them don’t have a power generator on their own, and all the machines had to stop.

So this is a period where timing reliability is lower than usual… You should “pad” your planning even more than usual!

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!

****************************************

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).

Many importers have no clue about the factory location. All they know is the general area, when they purchase in FOB terms, because they know the port of shipment (for example, if they purchase “FOB Shenzhen”, the assembling factory is in the South).

Buyers often get to know the factory address in Chinese, especially when they need to send an inspector there. How to read it and visualize its location at the same time? Google Maps is an excellent tool for that.

Now there is one small difficulty for non-Chinese speakers. If you paste an entire address such as this one, it won’t work:

广东省广州市海珠区琶洲大道东1号保利国际广场南塔1305室

You need to decompose the address. It is actually easy because the same characters are always used to designate the province, the city, and the city district.

Here are a few things to know:

• The Chinese start with the general and go to the particular. So they write the country, then the province, then the city, then the district of the city (if applicable), then the street address and/or the name of the building, and finally the block and the office number (if applicable).
• If they give you their address in China, they will generally start with the province or even the city (and omit the country, which is obvious).
• 省 indicates the province, so 广东省 is the province.
• 市 indicates the city, so 广州市 is the city.
• 区 (or 區 in traditional Chinese) indicates the city district, so 海珠区 is the city district.
• Whatever is after 区 is seldom found by Google Maps, so you can cut it off (except if you need the precise address). In our example, if you search “广东省广州市海珠区”, you’ll get a result. And you see that this address is right in the center of a major city (Guangzhou), so you know it can’t be a factory address.
• If you see an office/apartment number, such as “1305室” in the above address, chances are that you were given an office address rather than a factory address. It might mean that you work with an intermediary.

So let’s start again with another example:

南昌市青山湖区羅家鎮

This time the province is not mentioned. There is probably only 1 city with this name in China. If you cut off what comes after 区, you search 南昌市青山湖区 and you see it is in Nanchang city, Jiangxi province.

Any other tips?

Some really large factories appeared in the US and in Europe in the early 20th Century. The prime example is the Ford Motor Company and its huge factories. The basic idea was that the higher the number of pieces produced, the lower the unit cost.

This is what 99%+ of Chinese factories still believe. They’d much rather make 100,000 widgets in one batch, rather than 100,000 widgets over three batches.

Why is this a problem? Because this notion is misguided. Toyota started reducing the size of production lots in the 1970s, with great results on costs, quality, and lead times. Since then, leading manufacturers everywhere–including Ford–have decided to process smaller batches.

Focusing on large batches is looking for local optimizations, rather than driving overall costs down. But it also has an effect on quality. Here are the drawbacks of large lot production:

1. The first finished products can appear after weeks of production. Some factories do all the 1st operations, then all the 2nd operations, and so on until the last operation. When do they notice issues? Sometimes at the very end of production, because that’s when they can test finished products…
2. Buyers often ask for “production samples”, or “shipment samples”, to have an idea of what finished products look like. But sometimes the finished products appear very late, So what does the factory do, to send these samples in time? It often “prepares” them individually. As a result, these products are not representative of production.
3. There is a huge gap between engineering (i.e. the development of samples) and bulk production. They are done in different rooms by different operators and sometimes on different machines. The goal is to let the production operators focus on their own productivity, rather than stopping a line. But there are often differences between what a engineer makes in the sample room and what line operators produce. Many issues appear in production, and corrective actions are more complicated to implement at that stage.
4. Factory workers are paid by the number of pieces they make. Sometimes they see they are working on defective goods, but they keep working instead of sending the bad pieces back to the previous operation. I have seen this many times in Chinese factories. Sometimes even the supervisors see it but don’t stop the line!
5. Large buyers can pull much lower prices than small buyers, in some cases below the full manufacturing costs, in part because the factory over-estimates the cost savings it will achieve. After one of two years, the supplier notices that it is in the red and increases prices, causing the big buyer to switch to another maker.

Now try to explain all this to your Chinese suppliers, and good luck… You need to challenge the whole system. To be fair, importers also play this game by trying to fill containers up and improve freight efficiency.

Before you read this post, I have to emphasize that some trading companies here in China–including Hong Kong–truly create value for their customers.

What I wrote below does not apply to all intermediaries. But I observed it so many times that I believe it is true in 80%+ of cases.

The problem is that the interests of trading companies are seldom aligned with those of their customers. And it takes mainly three forms:

1. Trading companies tend to work with low-grade factories

A trading company is in a delicate situation. It has to make a margin and keep its selling price competitive. And it has to ensure that its customers and its suppliers don’t start doing business directly together.

The solution is usually to work with factories that are not quite used to exporting themselves. These manufacturers typically have a low cost structure and are not properly organized. Another advantage (in the eyes of traders) is that they seldom have any English speaker on staff.

When this is the case, the factory needs to be coached extensively to reach the quality and timing expectations of the customer. Needless to say, American/European/Australian purchasers do not tolerate what domestic buyers put up with. This coaching process starts being effective after 3 or 4 orders, when things go well…

2. Trading companies seldom tell their customers about quality issues

A trading company sells products to importers. Therefore, if a foreign buyer is not satisfied about the way an order was handled, the trading company can lose money: the purchaser can ask for a discount or a shipment by air, or even cancel the project. So these intermediaries often keep their mouth shut when they know of serious issues, for fear of frightening their customer.

To make things worse, many trading companies do not do check quality at all in their subcontractor factories. Their job is match-making, communicating, and shipping. After all, if the buyer is serious about quality, he will come and check it by himself, right?

The importer should take the lead and send inspectors in the factory. When this is the case, the intermediary has a strong incentive to avoid quality issues. For maybe 3% of their shipments, trading companies that work for my clients ask me to postpone an inspection because “[their] internal QC rejected the products, and re-work is under process”. When no inspection is scheduled, they never write this to my clients!

3. Trading companies often do not have any control over the factories

I had discussions with Hong Kong business people who invested in a factory in the mainland. The same remark came back over and over: “we really had to own the factory; if you don’t own it, how can you control it?”

A very small minority of trading companies have a stake in the factories in which they place orders, even though they generally pass themselves as the owners. They conduct friendly business (no contract, no penalties). When things go wrong they have no real power over the manufacturer, who knows that the middleman will absorb charge-backs and airfreight imposed by the importer rather than lose a customer.

Factories generally prefer to work directly with foreign buyers, who switch suppliers less easily than local traders. It means they will focus their efforts on making their overseas customers happy, and the trading companies’ orders don’t have the priority (unless they represent 40%+ of the manufacturer’s business).

What implications for importers?

I am not implying that all importers should “go direct” and buy from manufacturers. There are good and bad intermediaries, just like there are good and bad factories. And factories often sell what other manufacturers make, so things are seldom black and white.

But foreign buyers should avoid two mistakes:

• Trusting their “agent” for everything, including quality control. QC inspections are necessary, especially when a trading company is involved.
• Giving all their business to one trading company, without using competition as a leverage for better service and pricing.

One quick tip: you should spend 30min asking for quotes from other suppliers of the same product (using globalsources.com or alibaba.com) before you confirm an order to a trading company. Getting an idea of the “average market price” is quite easy. Some intermediaries apply a 20% markup while providing very little service…

Last weekend I got an interesting email conversation with my friend Paul Wijmenga. He lives in Xiamen and helps European importers source softlines such as shoes and garments.

Some of his shipments got stopped in the Port of Rotterdam because the Dutch Inspection Authorities detected an excessive level of dangerous gases. The Dutch government has stepped up its efforts to block such shipments, both for consumer and workers protection.

Last year, two containers of shoes were blocked because of high levels of dichloroethane and toluene. And recently another one because excessive levels of toluene and ammoniac were detected.

Where do these dangerous gases come from?

Our theory is that the glue used by the shoes factories (which comes with a strong smell) might be the main origin of these gases.

But it could also come from many other sources:

• The materials used in the sole or the upper of the shoes
• The packing materials (polybags, shoeboxes, export cartons)
• The pallets, even treated as required
• The gas already present inside the container
• The desiccants, which might absorb some chemicals and later release gases

How to avoid a high level of dangerous gases in containers?

Container inspection companies in Holland told Paul there are many potential origins, and that the level of dangerous gases usually increases during freight. So, most of the time, checking the container in China is useless.

Shipping companies told him this issue was nonsense; opening the doors for 15 minutes should be enough to get rid of unsafe chemicals. Unfortunately the Dutch Labor Inspectorate doesn’t see it that way.

So he took the following temporary measures:

• Factories should check that containers have no strong smell before they start loading the goods,
• In principles, the goods should not be packed immediately after getting out of production line. They should lay around for a few days, but it is not an ideal solution (it is actually impossible most of the time).

I advised Paul to use special polybags that close with a Ziploc system, but it seems like the customs also check gases inside the bags. He might also want to try to contact the glue suppliers, to get their advice (or at least the composition of their product, as a basis for analysis).

We are wondering if any reader has experience dealing with these issues.

If you have any idea, we would love to get your comments. Thanks a lot!

The question of who buys the materials has implications on the supplier behavior, on quality control, and on the risks incurred by the buyer. Yet it is rarely given much thought by importers who buy from China or other Asian countries.

There are basically three options, that I listed below:

1. The manufacturer purchases the materials from its own suppliers

This is by far the most common practice: one company buys the materials, turns them into a finished product, packs it all and ships it out.

Advantages:

• Easy to manage for the buyer.
• The supplier is “hooked up” because he likely disburses more cash than the deposit he received from the buyer. He can hardly risk an order cancellation until he gets the rest of the payment.

Drawbacks:

• Most Chinese suppliers buy either from friends or from the cheapest source. Quality is not a prime concern, so a pre-production inspection focusing on materials is often necessary.
• The supplier will seldom admit to any responsibility if materials are substandard, even though HE selected the sub-supplier.
• Buyers feel that the process is easy, and they don’t take the pain to define the “bill of materials”. When they discover issues related to unsuitable components, they are in an uncomfortable situation…

2. The importer appoints a supplier from which the manufacturer has to buy

This is quite common for labeling and packing accessories, since the goods have to look similar when placed side by side on store shelves.

It is also the case for the main components of the product when a designer works on the basis of specific materials to elaborate a collection (before suppliers are selected and production is launched.)

Advantages:

• Quality issues are less frequent, and collections have the same overall look.
• Here also, the supplier is “hooked up” by the size of the cash outlay.

Drawbacks:

• Prices are usually higher (even if the approved supplier agreed on a discount!)
• The manufacturer might use it as an excuse (e.g. “your appointed supplier’s delivery was late”, or “we wasted time sorting out the bad products from your supplier”). But they will probably not control these incoming materials… It is left up to buyers to arrange it.

3. The importer buys the materials and rents some “factory time”

This is called CMT (Cut, Make & Trim) in the textile industry, where it is quite widespread. (It is used in other product lines as well.)

Advantages:

• Workshops are truly interchangeable with a lead time of a few days.
• The buyer is certain that the materials come from the right supplier.
• The buyer knows how many finished products can be made, and the manufacturer has a hard time selling extra production via parallel channels.
• Again, lower quality risks, and higher predictability in the finished product’s aesthetics.

Drawbacks:

• The manufacturer is not hooked up in any way, so they might ask for a price increase at the last moment (e.g. “this is more complex and time-consuming than we thought”) or even take another order instead.
• And all the drawbacks of the second option.

———————

At the end of the day, it depends on how much of the supply chain the buyer wants to control. It takes some real organization, but also a deep understanding of the situation; importers seldom realize how complex supply chains in China really are.