No inspection. Bad quality. Don’t blame your vendor.

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I was reading another China blog today about an order gone bad. It was the same scenario we see over and over: Overseas company places an order in China; Overseas company does not inspect the order; China vendor delivers bad quality; Overseas company goes ballistic. I read the post and commented on it of course. But it got me to thinking about something. Whenever there is a bad shipment out of China the tendency is to blame the China vendor. But if you don’t inspect your order and it turns out something is wrong, then can you really blame the vendor? If you buy a pair of shoes without trying them on and you get home and the shoes are too big, whose fault is it?

I would add that it is true that a lot of vendors cut corners when you don’t look and that accounts for a significant amount of bad product out of China. Thus the need to inspect. But at the same time many vendors just don’t understand the sophisticated markets they are producing for and without the guidance of the buyer (in the form of incessant communication and detailed specs during pre-production and inspections during the main stages of production) they ship a lot of bad product. Thus, again, the need to inspect. Of course, when you inspect an order in China and see something that you don’t like, the SOP is to have the vendor fix the product in question before you allow them to ship it. You inspect it and OK, they ship it and you get what you ordered. Plain and simple in most cases.

Given China’s global standing as an emerging economy and its somewhat undeserved reputation as a country that churns out a lot of inferior quality product, I personally feel one can not fault a vendor for delivering poor quality product if the product has not been inspected by the buyer or a buyer designated third-party before the order leaves China.

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How to evaluate a potential China supplier. A useful tip.

Sometimes when I have a sourcing project I will send out an extensive questionnaire to potential suppliers. I usually draw up the questionnaire with my client and we try to cover all the clients’ needs on the questionnaire, from particular machines to production capacity.

As I see it, the questionnaire serves three purposes as follows:

1.) A completed questionnaire tells me what the vendor is capable of in terms of production capacity and quality standards. It will tell me about their QC and production process and who their sub-contractors are, if any. It will tell me about the size of their office and factory and how far one is from the other ( a very important piece of info). If my client has specific requirements in terms of machines e.g. a kiln for drying furniture this will be detailed on the questionnaire. Of course, there is no assurance that what the vendor fills out is in fact the truth, but follow up factory audits with questionnaire in hand should reveal any discrepancies. For example let’s say your vendor has answered on the questionnaire that they do not use sub-contractors. But when you are on-site for a factory audit you ask them about the machine embroidered logo for your product and they cannot show you where it is made. Well, right then you know they have out-sourced it.

2.) A questionnaire will tell me how earnest the supplier is. If the vendor fills out the questionnaire completely and offers a lot of information then I know they will probably be good to work with come production time. If a vendor sends back a questionnaire that is incomplete then right there that is a warning sign. You would be surprised at the character of responses I get when I send these out, but the good factories always fill out the questionnaire thoroughly.

3.) The questionnaire tells the vendor that you are organized and probably have experience dealing with a lot of factories. Right then it puts you in a position of authority.

I also think that you should ask for extensive photos of facilities when you are evaluating new suppliers. Sometimes you can tell just from one photo how a vendor might be to work with. I remember getting photos from one vendor last year. I had asked them to send me photos of their factory. One of the photos showed a container being loaded, and the cartons were just jammed in. I knew this was not the way to load a container – especially when the product is wooden furniture as it was in this case – and right there I had doubts about the vendor.

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How to find suppliers in China

If there was a foolproof method to finding good suppliers then I would not be writing this post right now. I probably would not even have a China -related job but would be off teaching 18th Century literature somewhere. The fact is that finding reliable suppliers is one of the most frustrating aspects of sourcing in China.

There are four ways to find suppliers in China:

1.) Online sites like alibaba.com and global sources. I am skeptical of meeting vendors online simply because you have no idea who you are dealing with. I sometimes find it useful to get quotes from online suppliers when I am trying to figure out how much something costs to make in China but as far as actually ordering from people I have not met and know next to nothing about I would not advise it. I certainly would not do it if it were my business. A lot of small companies, start-ups and mompreneurs source online because the costs are seductively low, it is an easy process and they do not understand what a minefield China sourcing is.

2.) Trade Fairs. This I think it the best way to find new suppliers. As I have lived in or travelled to China for 25 years and speak the language fairly well I have become pretty adept at evaluating vendors, and I would say that my snap judgments are fairly accurate. I can usually tell what a vendor will be like to work with after spending an hour in their trade show booth discussing things with them and then following up with them after the show about samples and other issues. Occasionally I am surprised when a vendor I had marked as a good prospect turns out to be otherwise. But like I said I generally can spot the good ones from the bad ones. I really believe that there is no substitute for meeting the people who are going to be making your product. It is expensive to attend trade fairs in China. But it is more expensive to take possession of 3 containers of shoddy goods you cannot pass onto your customer(s).

3.) US or Canadian based China agents or product development companies. Although agents can save you a lot of time, energy and money in the beginning, working with agents over the long-term can be a costly exercise in frustration. In fact, most of the inquiries I get are from people who are not satisfied with their US or Canadian based China agents. They are not satisfied with the quality of the product they are receiving or the rising costs of that product. Still this is not to say that there are no good agents out there. There are and I have worked with them. But my sense is that you have to go through a lot of bad agents to find a good agent.

4.) Referrals. If you have a friend or trusted acquaintance who can introduce a good vendor to you this can remove a lot anxiety and some risk when you source in China. There are two problems with this approach though: First, how many people do you know who are doing business in China in your same product line who are not competitors and would be happy to divulge their suppliers to you ? Second just because a vendor has proven reliable for someone you know does not mean they will be so for you. It all depends on your product, QA standards, target costs and QTYs. There is no vendor who is simply going to roll out the red carpet for you just because one of your friends is a customer of theirs (unless they are a HUGE customer). But getting the name of a factory from someone you know, if you can do it, is a very good start. You should at least receive prompt replies to all your production inquiries.

The key is as I wrote in my post yesterday, to manage expectations. It may take you a year or two to find a supplier you are happy with. If you know that going into your China sourcing, your experience in China will be better.

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The key to being successful in China is managing your expectations

Today I was thinking back to a conversation I had with a client of mine a couple of years ago. She was frustrated with her vendor/agent and was beginning to feel that doing business in China was just an endless cycle of trying out new vendors. She wrote as follows:

“I wonder whether I will need to continuously be sourcing new factories and taking a risk every time I do a production run with a new factory.”

My advice to her at the time was that she needed to find new vendors and spend more time developing relationships with those vendors. Easier said than done because she is a mompreneur and with 3 kids and a red-hot business has no time to travel to China to work with her vendors. But her vendor knew this and she was at their mercy. This is of course not an effective way to do business.

Thinking more about this today and reflecting on some of the other projects I have worked on over the last two years, I have come to realize that doing business in China is pretty much what my client described, a seemingly endless cycle of production runs with new vendors. Even some of the successful companies I work with who have an office in China find themselves going through vendors like I go through a batch of freshly baked oatmeal raisin cookies. The difference is that these companies usually have long-standing relationships with a couple of good vendors and this allows them to fulfill important orders at the same time they are looking for and trying out new vendors. It is essential they find new vendors because they need more production capacity as their business grows and they understand, very smartly, that at some point their existing partnerships may come to an end.

So being successful in China is a lot about managing your expectations. You cannot go into China thinking you are going to find one supplier who will deliver quality product to you at steady prices for years to come. The perfect spouse does not exist. The most you can hope for is to find a good vendor or two who will help you grow your business while you undertake a time-consuming, costly and often painstaking search for new vendors.

But in the end it is worth it because as I often say where else are you going to be able to make a high-end wood and brass picture frame for $ 1.50 ?

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Doing business in China is easy.

What people are saying about China Tips for Small Businesses

” A very interesting blog..”   – a company in France

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Every so often I have an enlightened moment where all my thoughts on China coalesce and I can see things more clearly than I saw them before. And this happened this weekend. I was thinking about some of my own projects and also about the “China chatter” that I read on other China blogs and Linked In – much of which has to do with how difficult it is to do business in China – and I realized that doing business in China is not difficult at all as long as you practice three things.

Patience
Common sense
Due diligence

If you can do these three things ( and 2/3 is not good enough) you can succeed in China. But what do I mean when I say patience, common sense and due diligence ? Here are some examples.

Patience: Many people try to source in China and after a couple bad experiences with vendors they met on alibaba, but never in person, they swear off on Chinese vendors and Chinese quality. This is not being patient. In fact there are a lot of bad vendors in China but also a lot of good ones. Sometimes you have to spend time, burning through a few vendors before you find one you can work with. It may take you a couple of years. But this is what I mean by being patient.

Common Sense: I have worked for companies and have had among my own clients individuals who just ignored the alarm bells and who insisted working with vendors who were not interested in working with them. Mr. F is a good example. Mr. F really liked the product of a certain vendor in Shandong Province. But the vendor did not seem to be interested in Mr F’s QTYs and felt his target costs were much too low. The vendor was simply not interested in the business Mr. F was offering them and this was quite clear in their emails. But Mr. F insisted on pursuing the vendor because he liked their unique product designs. Common sense, at least to me, says that you do not want to do business with those who do not want to do business with you. Another example of common sense is checking your order before it leaves China. But many people just don’t do this or they allow the vendor to do it. Common sense tells me that vendors are not going to QC your orders like you or an objective third party would.

Due Diligence: I can never get over how many people give orders to China vendors they have never met and know very little about. They trust the vendor because the vendor has given them a good sample and seems easy to work with. And most of all they like the cost. In short, you need to find out as much as possible about the vendors you are going to do business with even if that means paying 3K for a plane ticket and getting on a plane to China so you can meet the vendor yourself. This is an example of due diligence.

 

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If you have 100K you can sell your products in China

It seems that one of the trendy business headlines these days is about the opportunity American companies have now to sell their products in China. The opportunity exists because there is a growing middle class in China who are distrustful of Chinese made products. Both Forbes and the NY Times have run stories recently that extolled the opportunities in China for American businesses. And I sometimes get inquires from people who ask me about selling their products in China.

I remember 20 years ago when China was just a decade or so into its Reform and Opening policy. At that time it was also said that American companies had tremendous opportunity in China and many companies went to China with great expectations. One of these companies was a US regional fast food chain that opened a store in Shanghai in the early 1990s. They had a great location in one of Shanghai’s main commercial areas. The owners whom I met were very nice and they were full of optimism about their China venture. After all KFC was one of the most popular restaurants in Shanghai at that time. Over the course of the next few months every time I walked by the store, it was empty, like an old Sears Roebuck that had seen its day. Cashiers stood by their registers their faces blank with boredom, stains covered the tiled floor, a letter had fallen off one of the signs. And then one day nothing was left. All the equipement and tables had been removed. The only thing that remained was the broken sign. That store had become one of the many failed attempts to tap into the Chinese market at the time.

And this same scenario has played out in China many times over the years. The fact is that it is just not easy for small overseas companies to sell products in China. Most Chinese consumers want name brands or local brands and have no interest in paying 25 % more for a brand they have never heard of. So it is not surprising that currently only 6 % of China’s imports come from the US, and these are mostly electrical, industrial goods, vehicles etc., hard goods Chinese businesses need to build up China’s infrastructure.

Finally, the NY Times small business guide to selling in China advises small companies who want to sell their product in China to set up in China as a WOFE ( Wholly Foreign Owned Enterprise). In this way one can avoid ineffective distributors and Chinese partners. However the total cost to set up a WOFE is about 50K and can easily run 100 K. I don’t know of many small to medium sized businesses that are willing to make that kind of investment in a country where doing any kind of business is risky. I would not do it.

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Validity of vendor quotes. Do not ignore.

When you are going out to vendors for quotes, you have to keep in mind that quotes are good only for so long. How long vendors hold quotes really depends on the product and industry. If you are sourcing cotton sheets, for example, you might find vendors will not hold the cost beyond one month because the cost of cotton in recent years has been volatile. For example from the second to the third week in January 2013, Cotton prices rose sharply on world markets and this of course affects your production in China. On the other hand if you are doing a printed product vendors might hold quotes for up to 6 mos because the price of paper is more stable.

How long vendors hold prices also depends on the margins for the product. For high volume low margin orders, vendors might hold prices for as little as two weeks because the slightest downward move in the price could mean an economic loss. For example, if I wanted to order 500,000 plastic bags at $ 0.10 per piece. If the price of materials went up even $ 0.005 over two weeks, the vendor would stand to lose $ 2500.00. For higher margin products, like furniture, vendors are more inclined to hold prices for longer because they stand to make money even if the price of raw materials increases between the time they quote you and the time you place an order.

Finally, a vendor may honor a quote well after it is out of date simply because they need the business. Similarly, if they have other orders and they do not really need your business then you can expect the quote to go up.

Always ask vendors how long their prices are good and keep this in mind when you plan your production.

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What to do when a vendor raises costs ( cont)

To continue the story of my client who had emailed me about the sudden rise in cost and MOQ from her vendor in Liaoning. When I told my client that she had done everything she could have done with this vendor, in terms of visiting them, starting out with a small order and then QC’ing the order before it left China, I added that the only thing she might not have done was to send the vendor a strong message that sudden and steep price hikes would not be tolerated. To this she replied:

“We actually DID have the conversation about cost hikes on our visit. It came about by accident. We were at the market and I was surprised at the cost of the stretch velvet, which was higher than what we pay in the south – I told Mary I was surprised that they could give us such a good price with the cost of velvet that high. And she flat out said that her boss said to give us a good price to get our business, so I brought that to a grinding halt and we discussed this. I told them that we did not operate that way. We expected the correct price at the outset etc etc. Bob and I further discussed it with them in a formal meeting.”

After I received this reply, I spent a few hours on some other China sourcing blogs just to see what other people who work in China and encounter this problem advise. But, I did not find anything beyond what I advised and what my client did. In other words there is really nothing you can do to prevent these sudden cost hikes. Nevertheless, I would qualify my advice to my client and say that you never want to appear desperate to a vendor or give them the impression that they, the vendor, are everything you have been looking for. You should always leave them with the feeling that you would like to do business with them but that you have plenty of other options. I am not sure my client did this or not.

Thinking more about this issue over the weekend, another thought occurred to me, namely that it is SOP in China for vendors, when asked, to tell you which companies they have manufactured for. The vendor in Liaoning listed companies from all over the world, including some global names, on the questionnaire that I submitted to them at the time I was reaching out to factories. So assuming you have gone to China and audited a factory and everything checks out the last step in the process might be to ask your vendor who their other customers are and ask them to prove to you that they have had longstanding relationships with some of these companies. They should be able to provide this to you in the form of invoices. I have never in fact tried this but it might be a way to see if a vendor is a good long-term prospect. After all if an overseas company has been a customer of Vendor X for 3 or 4 years it tells you that Vendor X probably does not have a lot of unreasonable cost hikes. However, I would only try this if I was on site at the vendor’s office, and was more or less prepared to give them an order. I would think then that they would be willing to pull out some invoices right there to demonstrate to their customer that they were a reliable vendor.

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What do you do when your vendor raises costs ?

I had an email from an old client today regarding an increase in pricing and MOQ that she had unexpectedly received from her vendor. This is her email, edited for the purpose of this blog:

“I would really like your opinion on something if you have the time. As I have told you, things have been going well with Vendor X up north. We placed a small order and we went up to inspect it and it is now on its way to us. The leak in the boat came when I submitted some additional designs for consideration.

So, let me step back a bit. I sent a representation of samples early on for review and pricing based on 2000 units each. The pricing was good (15%-20% less than our Guangzhou factory) and the samples were very good.

We visited Vendor X’s factory and were very impressed with their order and cleanliness. The work they do is top-notch. We had a really good two or three days with them discussing our business practices, and I sincerely believe they are good people.

We submitted the order and saw it through and product is on it’s way to us and they have another order in hand.

I submitted 4 dress styles for pricing and they have come back with pricing that is higher that what we are currently paying in the south and with MOQ’s that are extremely high. I am talking quantities we don’t even do with (name of major global retailer) per SKU.

Mary, whom I correspond with at the factory, says that it is the fabric mills that are forcing their hand in these high MOQ’s. I have visited these very fabric mills and I truly understand the volumes of fabric that must be processed when a special dye lot is requested or a print or glitter application. But this is not a problem we run into in the south of China much. We are able to get rather low minimums.

We just flat-out cannot work with the prices and minimums they have given us. I just wonder what you think of it all? Were we “played” by them in order to get out business? What could we have done differently?”

My client has done everything right here. She requested and approved samples before giving the vendor an order, inspected the factory and spent a few days there getting to know everyone, and inspected her first order before it left China. This is how you do business in China. I think the only thing she might not have done is to talk to her vendor about price increases and MOQ at the beginning, letting the vendor know that significant price increases would absolutely not be tolerated. And then to line up another vendor who could pick up the order should Vendor X prove unworthy. Had my customer been very firm about her expectations regarding price increases at the beginning then Vendor X – thinking they would raise prices and MOQ after a successful first order- may have just passed on the order altogether. Of course my client would have been short one vendor but she would have saved herself some time and an aggravating experience.

But what did the 18th Century poet Robert Burns say, “Even the best laid plans of mice and men go awry.” And this happens in China all the time. Doing business in China is all about reducing risk, which means eliminating the bad vendors before you get involved with them and feeling reasonably confident that the vendors you do give orders to will meet your standards. However, this is not to say that a vendor whom you have done your due-diligence on and who has delivered a perfect order to you may not turn around and become a problem vendor at a later point. It happens a lot. Short of a referral from a friend, which is hands down the best way to find a reliable vendor in China, you have to rely on due diligence, patience and luck.

I will update this story. I too have an interest in this since I found the factory for my client.

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Keep your retail pricing confidential when negotiating with a supplier

Working in wholesale I once had a colleague who said to me: “After working in wholesale I never want to pay retail again.” The mark-up from wholesale to retail is so great that if one knows what that mark up is then they often feel a sense of consumer outrage.

Imagine then how vendors in China feel when they see the mark up from production cost in China to retail cost in the US. For many the mark up is a shock. And who can blame them when a picture frame made in a factory in Shenzhen for $ 5.00 ends up in a London retailer for $ 250.00. For this reason the GOLDEN RULE in wholesale is never to let your overseas vendors see your retail pricing. Because if they see the retail pricing then they will naturally want a bigger slice of the pie. For brick-and-mortar wholesalers this is not hard because many do not publish their pricing online and most have longstanding vendor relationships so costs can be controlled.

However, for online businesses who have all their retail pricing on their website, and who source via alibaba, keeping retail pricing confidential when sourcing in China poses an entirely different challenge. Yet many online businesses that come to me are not aware of this challenge. Most assume that costs in China are what they are and that vendors in China just want the orders and acquiesce in the steep mark-ups from first cost to wholesale to retail. There is a kind of cultural arrogance at work here.

The fact is vendors in China do care about the mark-ups. When I worked in the China office of a major US textile company, people in the office would sometimes see the retail pricing – for example if we were printing the price tags in China – and they would express their feeling of exploitation and displeasure to me. I always felt a little embarrassed about this but there was nothing I could do but try to explain to them that there were a lot of costs along the way from the factory in Shanghai to the flagship store in NYC, and that the company we were working for did not pocket all of the difference.

For this reason if you are an online business and want to negotiate a cost with a first time supplier then you should exercise a little sensitivity and try to use a third-party so as to keep your company info and pricing confidential. Of course, if you place an order with a vendor they will learn who you are and see your pricing eventually. But the point is that your relationship with your new vendor will start from a much lower first cost than would likely have been the case had they known your retail pricing to begin with.

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