Trading company versus factory

I have worked as a full-time employee for several companies over the years and at all but one company the sourcing strategy was to deal exclusively with factories and to avoid trading companies.  Some product development and sourcing  professionals are very knowledgeable about their product and industry and find they can have more productive discussions dealing directly with the factory than going through an agent who does not possess product specific knowledge in many cases.  Representatives of trading companies are also notorious for not spending a lot of time on-site at factories and specifications sent from customers are sometimes passed on only via fax or phone – thus increasing the likelihood of error.  The result is that quality cannot be controlled easily. You can control quality much more easily if you deal directly with the factory, provided there are no language barriers, and provided you show up in China occasionally. Of course, one of the main reasons that importers like to avoid trading companies is cost. If you go direct to the FTY you will generally cut your first costs in half.  Sometimes your first cost savings by going directly to the factory will be as much as 60 %. 

However, this is not to say that trading companies have no value. In discussions with friends and local agents in China this past year I have come to realize there are exceptions – when working with a trading company is preferable to going it alone.  One exception is when you need to source a special product e.g. an unusual fabric or a special type of plastic. You may spend a lot of time looking for a factory that can do what you want or you can go through a trading company that may already have relationships with factories that will be useful to you.  Provided the trading company has proven reliable after a rigorous sample order and has passed a credit check it might be OK to use them.  Another case when you might want to use a trading company is when you have a low value/high volume product that does not need extensive QC. If  the trading company can give you a lower cost than the FTY – which sometimes does happen – then it probably makes sense to use the trading company. 

In short, think factory direct – especially if you have a design-driven product –  but don’t rule out the possibility of using a trading company if necessary.

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A visit to a vendor with a lot of red flags

I have been working with a bag vendor over the past several months on a project for a customer of mine.  This is a vendor I met back in May at the Canton Fair.  When I first met them they told me that they owned the FTY where the bags were made and I have been working under that assumption since May.  There were doubts in my mind but as I have not been able to visit them until recently I gave them the benefit of the doubt. “Trust but verify” as Ronald Regan once said about the USSR.  The same can be said when doing business in China. 

 The samples this vendor (hereafter referred to as Vendor A) has done for my customer have been approved by her at prices that are acceptable to her. My customer was prepared to give Vendor A an order but I suggested that I first go have a look at their office and factory when I was in China for the Canton Fair.  And that is what I did accordingly.  Unfortunately, what I found was not as Vendor A had led me to believe.  I first visited the Vendor A’s office on the outskirts of Guangzhou. The office was much smaller than I had expected based on their large and very sleek booth at the Canton Fair. There were only 4-5 employees and the name of the company was not even stenciled on the door – as it was on several other doors on the same floor. This was strange and I realized either it was a short-term rental or Vendor A did not want to pay for the stencil ( indicating cost-sensitivity which would not be good for my customer). RED FLAG # 1  While in the office we discussed a sample that Vendor A was working on for my customer. My customer requires YKK zippers for this bag because she has had problems with the zippers breaking on her bags. Her bags retail at an exclusive price point that demands a quality zipper. Vendor A showed me a YKK zipper and told me it would be 22 RMB. I was a little questioning especially because he showed me the zipper only and not the “YKK” puller. RED FLAG # 2 

After the office visit we went to lunch and then I was taken to two factories, a big factory and a small factory, The big factory was used for large QTY orders and the small factory for small QTY orders. This is SOP in China manufacturing. Companies that do not own their own factories or have just a small factory will often contract with a big factory for big orders. This is a very practical arrangement because big factories do not want small orders and small factories do not have the capacity for large orders. I had suspicions as soon as we walked in the gate of the small factory and I met “Ms. Yang.”  She was introduced to me as the FTY manager but when I asked her for a name card – to see if the name of  Vendor A was on it – she said she did not have one, adding that she had used them all up.  People just don’t get caught without business cards in China, especially “managers” of factories.  It simply does not happen. RED FLAG # 3.   During my visit Vendor A and I sat down with Ms. Yang to discuss the design on some bags and Ms. Yang started to discuss the YKK  zipper with Vendor A, unaware that we had just discussed it in his office. She told him (in Mandarin) that the zipper had cost her 8 RMB but she was not sure if it was a real YKK  zipper or not ! RED FLAG # 4. Vendor A was visibly embarrassed by this and sought to move the discussion in another direction.  On my way out I took a photo of the factory’s business license and when I looked at it closely while we were in the car heading to the second factory I noticed that Ms. Yangs name was listed as the principle investor/owner of the FTY. RED FLAG # 5.

When we arrived at the big FTY I was impressed with how large and how busy it was. There were bags in production in every workshop and I did not see an idle sewing machine ( there must have been 100 machines in the building I was in). The sample room resembled a bee hive. Since there were a lot of orders on the factory floor, I asked Vendor A to tell me about some of the orders, including customers and PO QTYs. He didn’t seem able to say anything at all. RED FLAG # 6 I then asked him to show me some of his company hang tags as I know well that FTYs usually have lots of hang tags lying around. He explained that there were no Vendor A tags or labels because all of the bags were being made for customers using their own hangtags. Yet all Vendor A had to do was to go to the sample room to get a tag (because factories of course mark samples with their own tags) RED FLAG # 7. I also took pics of a production board and all the “customers” listed were Chinese. RED FLAG # 8. I thought this was all very strange and at that point I had pretty much decided that Vendor A did not, in fact, own this FTY, or the other FTY we had visited. I should also mention that while we were on-site there were absolutely no pleasantries exchanged between Vendor A and workers or factory personnel. It was as if we were not even visible.  This seemed highly unnatural. RED FLAG # 9. If he did indeed own the FTY certainly Vendor A would have checked up on some orders or introduced me to some key staff members. When I asked to meet the manager of the FTY I was told that it being a Saturday, he was not there. RED FLAG # 10.

Later that evening Vendor A dropped me off at my hotel. I went upstairs to collect my notes discouraged that I would not have good news for my customer but glad that I had done DD for her and perhaps saved her thousands of dollars. The moral of the story: never give a vendor an order unless you have visited them first.

Back to the drawing board on this project.

Sample fees – sometimes reasonable, sometimes not.

Earlier this summer I requested samples of a product from five vendors and one of them asked me to pay for the samples. In fact, I have always wondered why some vendors want you to pay for a sample and why others when sampling the same product do not. When I visited the vendor who had required payment for samples I may have answered my own question. The vendor did not own the factory where the samples were being made. They were obviously being asked to pay for the samples by the FTY and they were just passing on the cost to me.  So this may be a good way to evaluate a vendor, especially one who claims to own the factory where your product will be made. Do they ask to pay for samples?  If so, they are probably just acting as an intermediary between you and the factory.

Other vendors generally have set up costs for samples which they just can’t afford to absorb. Plastic products are a good example. Machines have to be cleaned thoroughly before a sample can be produced and there is a cost associated with this. There is also significant CAD design work needed to do samples for plastic product.

In other words, whether a sample fee is necessary or not all depends on the product in question. You really have to look at your product and the cost to decide whether a sample fee is reasonable.  For a $ 1500.00 chair a sample fee is reasonable. For a $ 5.00 basket a fee is not reasonable.  Another good rule is this:  If, for a certain product, the majority of vendors do not ask for a sample fee, but a few do, then forget the few who do. They are either trading companies or they are cost-sensitive factories who you would probably not want to deal with anyway.

The new buyer-supplier relationship in China

Since China opened its doors to the West in 1978, overseas buyers have come to demand and expect perfection from their Chinese suppliers, even for low value-handicraft product.  Up until very recently this mindset was tolerated by Chinese vendors because over the years orders from overseas accounted for most, if not all, of their sales revenue.  There was very little demand coming from within China itself and Chinese suppliers had no choice but to defer to their overseas customers.  But this is  no longer the case as domestic demand – not orders from abroad – is driving a myriad of Chinese industries nowadays.  A case in point : during my visit to the Canton Fair last month I saw more mainland buyers than I had ever seen at the fair previously and I overheard conversations in Mandarin in which vendors were negotiating with domestic, not overseas, customers.

In fact, if given the choice Chinese vendors would probably prefer to manufacture for the domestic market for several reasons:

1.)  Chinese customers present very few, if any, language or cultural barriers. When communicating with overseas customers, on the other hand,  China vendors must pay for skilled staff who can speak English, and they must entertain overseas customers, often at their own expense.

2.) There are significant incidental costs when dealing with overseas customers.  For example vendors may be asked to pay hefty air freight charges for late or incorrect samples and/or production.  Orders are also subject to lengthy delays because of design requirements, and there are frequent lags in international communication and logistics. I don’t know if I have ever been in a Chinese factory where a worker or management has not complained about an overseas customer’s product specifications or lead-time requirements.

3.) The market in China for consumer goods is not sophisticated vis-a-vis markets in the west.  There are no extensive product testing protocols in China that rival CPSIA in the US or EN-71 in Europe. One vendor recently told me that most of the PU his factory used had not been tested for Phthalates and that if my customer wanted Phthalates free PU they would have to order a special grade at a much higher cost.  In other words, Phthalates is not something Chinese factories have to worry about when they manufacture for their own markets.

The result is that many Chinese vendors now seem to have a take it or leave it attitude with overseas customers. I have been surprised how many companies I have contacted this year have not sought to follow-up on samples sent to me or who have expressed little or no interest in doing business with certain of my customers. They have failed to do so either because the MOQs I have provided them with are not large when compared to those of other overseas buyers, or there is plenty of domestic demand with equal, if not larger, QTYs. 

Overseas buyers need to exercise some sensitivity about these changes in China manufacturing, all the more so if they do not have large order QTYs. Sampling demands should be kept to a minimum and product design should be well thought out on the buyer end so that little is left to the vendor to solve on his/her own. Vendors do not want to spend valuable time re-designing your products.   Buyers should not rush vendors or work under the assumption that their order is the most important order the vendor has on their production schedule.  Most often it is not.  The point is this:  China vendors still want your orders.  But  they are no longer  desperate for them.