FOB vs CIF

I had an inquiry today from someone who wants to move their CPG ( Consumer Packaged Good) production from the US to China.  They want to ship CIF which stands for Cost Insurance and Freight.  In a CIF transaction the supplier/exporter is responsible for assigning a carrier/vessel and insuring the cargo.  Once the vessel lands at the destination port the buyer/importer takes possession.  The main advantage to doing a China order CIF, as opposed to FOB ( Free on Board) is that the supplier handles all the shipping arrangements for you.  You simply have to pick up the cargo when it arrives and arrange for transportation to your warehouse. In theory CIF reduces the work load on the importer and may seem like the ideal arrangement for a first time importer who has no experience with international shipping, which can be quite complicated.  The downside to CIF however is considerable.  Your product will cost more because you are asking your supplier to bear more responsibility and not surprisingly most suppliers will look at a CIF proposal as an opportunity to pad their margins. In addition, you lose transparency on the real cost of your product.  The real cost of your product is what it costs to make and package your product.  Not what it costs to ship your product ( which is landed cost and which varies depending on a number of factors). You will also have no control over shipping.  If yours is not a time-sensitive order then CIF might be OK.  But if you need your product shipped on a timely basis, to fulfill orders, you will be taking a big risk because you will have no control over transit times and carriers.  In fact, your supplier may not choose the best carrier but the carrier who offers them the most preferential terms.  Your supplier will act in their best interests, not yours.

With an FOB order, on the other hand, the importer, working with a Logistics company, has complete control over shipping.  If problems arise you can work quickly with the carrier directly to resolve them.  The downside to FOB is that, yes, you need a Shipping or Logistics Company to help you arrange shipping. This is of course another cost, one of the hidden costs to overseas sourcing.  But you have to look at it as one of the necessary costs and you should be prepared to bear it.

In the end your expenditure will probably be the same, whether you allow your supplier to arrange shipping, resulting in a higher unit cost for your product, or whether you enlist the help of a Logistics company to help you arrange shipping and handle documentation.   It is when problems arise that you are far better off with your own shipping agent as opposed to trying to resolve problems with an anonymous shipping company that has been selected by your supplier.

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How to deal with rising costs when sourcing overseas

I was reading another sourcing blog this morning and author, Mr. A. whom I know and respect, was talking about how to deal with rising costs from your suppliers in China, what every importer grapples with sooner or later.   His solutions were as follows ( with my response in in italics) :

  • Sell a product with higher margins

Disagree. I don’t think one can just switch products like this.  I would say most small companies or start ups have unique products that they have spent time developing (the reason they have gone into business in the first place). They are married to their designs and they simply cannot jettison them.

  • Smart product design

Somewhat agree.  This is the importance of working with a good supplier.  A good supplier will help you to look at and improve your product to hit target costs. But at the same time this is easier said than done because some product changes result in less than expected cost savings. And unless you have significant order QTYs you are probably not going to see substantial savings.

  • Remove excessive packaging

Disagree. Packaging is so important and unfortunately can be a major cost. In fact, I would prefer to err on the side of having more packaging than not enough packaging which can lead to damages in transit.

  • Produce in other countries

Disagree. I have talked to many companies who produce in other countries.  Apparently countries like Vietnam, Mexico, Indonesia are no better than China.  And in many cases e.g. Mexico they are worse.

  • Pay your suppliers in their own currency

Disagree.  This involves more hassle than it is probably worth and many vendors want the USD. I would add that the costs of setting up a foreign bank account, what you need to do in order to pay vendors in their own currency, will probably offset any savings you will get.

If Mr. A, whom as I said I respect, cannot come up with a good solution about how to deal with rising costs in China and in other countries, then there probably are no solutions.

But # 1 on the above list got me to thinking.  If you can’t change your product, and I really don’t think you can, maybe you can change your customers.  In other words, let’s say instead of trying to sell at  Wal-Mart, you simply focused on selling on your own website and on Amazon Marketplace, for example. This is known as multi-channel eCommerce selling. Of course your orders would be smaller but your margins would be  greater.  And you would not have to be overly concerned about rising costs, shipping deadlines, inspections etc etc.  In fact, I think your only concern would be meeting MOQs.

A case in point. I visited a local company last week.  They  were established 15 years ago and seem to be doing quite well.  They do mostly online sales ( a children’s product)  and have several hundred independent brick and mortar accounts nationwide.  I got the feeling from my visit that business is good and the owners of the company are already planning years ahead for their brand.  And as I was heading back to the car I  thought back to a discussion I had with one of my former clients last month who told me that after years of targeting big box retailers, where he has sold with some success, he was going to scale down and focus more on sales from his own website.  He told me he has burned out with Wal-Mart where sales in some stores are great and in other stores not so great.  And not only does one have to tackle fickle consumer demand but they also face compliance guidelines, delayed payouts, chargebacks and  imperious buyers.  I have worked on many of these big-box programs and they are a headache. Pure and simple.

However, the icing on the cake is a blog post from a former retail buyer that I came across yesterday.  She says that accepting an order from a big box retailer can actually be a strike against you with that same retailer.   If you are considering doing orders a big retailer then read this first.A Buyer’s perspective

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How to source apparel in China: The Basics

I don’t take on a lot of apparel projects even though I get inquires from small apparel companies a few times a month.  The reason is that I don’t have a lot of experience with apparel and it is outside my comfort zone. A few years ago I somewhat reluctantly agreed to do an apparel inspection in China for a company I know.  I found it very challenging simply because I did not have a lot of experience in garment sewing, which is very different and far more complex than home textiles sewing, where I do have a lot of experience. In fact I spent a few years in Home Textiles production in China and in that time I learned how difficult textile production can be, from achieving the right colors on fabrics to the intricacies of CMT ( Cut, Manufacture and Trim).  But even my experience in home textiles did not prepare me for the severity of inspecting a 30,000 pc apparel order in China. Just the notion of stitch geometry or the myriad handling strategies when sewing a garment depending on the shape of the fabric is enough to scare one off.

Yet, even though I don’t generally take on apparel products I do know some basic things you need to consider when you are sourcing apparel in China.  And these are the things so few people include when they approach me with a project request:  Accordingly here they are:

  • Pantones for all fabrics, logos etc. Pantone books are very expensive but if you are sourcing apparel overseas having a Pantone book is indispensible.  And the best Panton book ( and there are many) are those with multiple pantone chips of the same color – so you can send a vendor one pantone and have extras for yourself.   Do not think your project will go well if you don’t provide your vendor with a specific pantone.
  • Sizing in CM, find a sizing chart online showing differences between US/European and Chinese. Don’t just assume that your vendor knows US sizing charts because they have manufactured for US customers before. You would be surprised at the stories I hear e.g. medium sized garments coming in from China that fit like XS here in the US.
  • What kind of fabric you need. Be very specific here.  Type of fabric e.g. if cotton what kind of cotton. Is it Gingham, Flannelette, Pima etc etc  ; Weight. Usually measured as the weight per one meter of fabric/weave  g. plain, satin, twill etc etc  etc.  It is not to be expected that you will know all this info off the top of your head but you need to know it. The best way is to go down to your local fabric store and ask them to tell you what the fabric is. And then go to another fabric store to double check the info you have been given.
  • Detailed patterns done on CAD. Check with the vendor to see which format they need CAD in. There are several formats.
  • Components (if applicable) buttons, zippers etc. Specify these as best you can. The more info you give your vendor, the cheaper your cost will likely be. Not only does it project to the vendor your knowledge of your own product but it decreases the likelihood that they will source a more expensive component for you than you actually need.
  • Labeling requirements. These are important and will impact cost. You need to include all fonts.
  • Testing requirements. Never to be overlooked with any product and essential for any apparel product being imported from China.

Be prepared to have to meet MOQs per design/color and even size.  The reason is that the factories that sew your garments are are ordering fabric from 3rd party suppliers.  The CMT factories do not make their own fabric and therefore they face MOQs as well from their own fabric suppliers. I see so many people who have a new apparel line and they want to have as many SKUS as possible because it makes their line more attractive. But they don’t understand where factories in China get their own fabric and that  there are very stiff MOQs for fabric.   So you have to always think the fewer SKUs the better. At least when you are starting out.

Finally, make sure you have plenty of fabric on-hand so you can send prospective vendors fabric swatches. There is no substitute for providing the vendor with an actual sample of the exact type of fabric you want to work with.  And, once again, the fabric store is the best place to go.

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Podcast: How to source in China

I was the guest on a Podcast recently.  The program is hosted by Indie Brands a popular website for independent start ups.  There is a lot of useful information here for small businesses, whether sourcing in China or not.  Enjoy

Indie Brands Podcast Feb 2016

Required reading for anyone thinking about sourcing in China

I was thinking this morning how many times over the years people have told me how they were cheated when they sourced in China. One of the better articles I have read on this subject appeared in 2013 in Inc Magazine.  The article describes the trials and tribulations of one entrepreneur from Ann Arbor Mi who learned the hard way that doing business in China is not easy. It is such Ona good article, in fact voted one of the best business articles in 2013, that I usually send the link to prospective clients who are approaching me to help them.  I see it as required reading for anyone who is thinking of doing business in China. INC Magazine article

 

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An American CEO who is jaded by China

I sat down yesterday with a local entrepreneur. He owns a chemical products company that he established ten years ago and the company has grown from 5 to 10 employees over the last year.   He wanted to talk to me about China or, more aptly put, he wanted to complain about China.  He detailed for me some of the challenges he has faced there over the last ten years.  Among the things he told me:

  • He hired a Chinese employee only to have that employ take his formulas and set up his own company in China. And then this ex-employee had the gall to approach his former boss and offer to be a supplier. Because the prices were good the American could not resist and he is now buying his own product from someone who stole that product from him!  I have heard these outrageous but true stories so many times before.   There is no way to avoid situations like this but by making sure you vett the people you are employing as thoroughly as possible. I should have asked about his hiring process but I didn’t. But a good tip is this if you are protective of your IP you should never hire anyone but a US citizen or permanent resident who can be held accountable under terms of an NDA.
  • As a side venture the entrepreneur tried to export California wine to China, under private label, only to find that he had to register his designs with the Chinese govt. and was forced to have a Joint Venture (JV) partner. He seemed to think this was just opening the door to getting ripped off again. Of course it is. But as I explained to him if you are making a good profit off of China, it shouldn’t bother you if your JV partner in China is making a good profit off of you.
  • He attempted to learn Chinese believing that it is very important to speak the language of the country where you are doing business. I couldn’t agree more.  He mentioned what a hard language it was to learn.   But he said that he was forced to give up his studies when the SARS epidemic broke out, believing that he would not be able to spend time in China to practice. I don’t know what to say here but it does not sound like he made a sustained effort.  And that is what it takes to learn Chinese, a sustained effort. It is a hard language. He is correct.
  • He wanted to know how I had avoided becoming jaded when dealing with China over the years. I told him about George Kates, an American antiquarian who lived in China in the 1930s and wrote a book about his experience entitled “The Years That Were Fat.” George Kates, The Years That Were Fat  Kates spent seven years in China and he said that in order to live in China the one thing that is most important is patience. So, yes, patience is the most important thing when you do business in China.  Another key to succeeding in China is that you have to like China.  If you don’t like China, don’t like the food, the people, the history or culture, it is probably not a place you should locate your business. You will get jaded quickly as I sense he has.

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China sourcing from the perspective of a Hong Kong Sourcing Agent

I had an email the other day from a Chinese sourcing agent who is based in Hong Kong, Chris Lo.  Chris said he enjoyed my blog and wanted to offer a few useful observations about sourcing in China from the perspective of an on-the-ground local Hong Kong sourcing manager.  Accordingly, here they are ( his observations in Italics ) :

  • Chris writes that when you deal with suppliers in China it is always good to use a factory with Hong Kong or Taiwanese management if you can find one.

This is correct.  The reason is obvious, the HK and Taiwanese managers are just more in tune with Western and Japanese business practices and they tend to manage their factories well.  The only caveat is that you will probably end up paying more for your product than you would were you to use a Chinese mainland managed factory.  Still, I think it is worth paying a little more to get better communication and often better quality and for this reason if you do have a choice between giving an order to a Hong Kong managed FTY or a Mainland managed FTY, you should always give the order to the Hong Kong/Taiwanese FTY even if the cost is greater.

  • Chris mentions that as the Guangdong Government is trying to phase out Low Cost Manufacturing, many industries are relocating to the Eastern China, Zhejiang, Shanghai, Jiangsu i.e. The Changjiang Delta area as opposed to the Pearl River Delta area in Guangdong. He says that he has heard from other Hong Kong based sourcing agents that the MOQs are very high in these areas now, while quality tends to lag.  One reason is that these are bigger FTYs and they need bigger orders to stay afloat.

That the Central Govt is trying to phase out Low Cost Manufacturing in the South of China has become something of a standard line in recent years.  Nothing new here.  But this is the first time I have heard  about higher MOQs and lower quality coming out of suppliers in Eastern China.  I think this makes sense because manufacturing around Shanghai, in places like Zhejiang and Jiangsu tends to be on a larger scale.  I have been in a lot of huge textile and furniture factories there over the years, much larger than anything I have ever seen in other parts of China. So it is quite natural that these bigger FTYs need bigger orders to stay afloat. I am not sure about the quality statement.  I think it depends on the industry and product.  I do think that the South is still a good choice to source products because the infrastructure and product knowledge have been there for several decades whereas only in recent years has other manufacturing moved up north. Of course I would qualify this by saying that once again it depends on the product and industry.

  • Chris mentions that Fujian Province is a good place to manufacture now. He says it is a very good place to send your apparel projects and that all of the big global brands have production there.

I was not aware of Fujian Province’s strength as a textile producing base. I have made 2-3 trips to Fujian Province over the last 10 years and my sense there is that prices are very low, but that quality is an issue.  But these were not textile orders I was working on so I would not know. Still, I would be a little cautious sourcing in Fujian Province. It does not have the infrastructure that the low cost South has, nor the sophistication that areas feeding Shanghai have e.g. Zhejiang and Jiangsu.

Finally I would like to quote Chris verbatim for something he says about the ease of online sourcing these days:

“Doing business in China without regular checking would have a high chance going wrong (but I guess it is same for everywhere.). So to me I’d like to comment also on the emerging e-platform, I think it is just for gaining exposure for the suppliers but you cannot do industrial production without directly getting to your supplier, having face to face meeting and in-line inspection; the old fashion way of visiting industry fairs, factory visits still has place a good value for doing so. Industrial production is not talking about selling one item with simple emails and clicks.” 

I like that about the “old-fashioned” way of sourcing.  I agree, it is just a much safer way to go about it. 

Thanks Chris !

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Attending the Canton Fair for the first time ? Prepare, prepare, prepare.

The Fall Canton Fair is coming up next month.  I have not been to the Fair in a couple of years and I do miss it, from the excitement as we get on the shuttles to the fair every morning to a cold beer in the hotel bar with other traders at the end of a long day.  It is kind of like being on tour with the Rolling Stones.  I always prefer the fall fair to the spring fair because the spring fair usually coincides with the onset of rainy season and with May Day which can make travel in and out of China pretty uncomfortable.  The fall is much nicer weather wise and the major fall holiday, National Day, occurs well before the fair. So if you are planning on attending one of these fairs, by all means go in the fall.

I had an email from someone the other day who is headed over to the Canton Fair next month. He will be attending Phase 2 of the fair looking for toys for his online business. This will be his first visit to China and he is understandably nervous.  I told him he needs to prepare, prepare, prepare.  This means putting together a list of the vendors he would like to meet with, contacting them prior to the show and then mapping out his visits beforehand.  The fair is too immense to just ‘wing it’ as they say.  If I remember correctly Toys take up Hall 14 1-3 and some space in adjoining halls 13 and 15 meaning there are probably between 1200-1500 toy vendors.  Needless to say, no one can visit that many vendors in a few days’ time, and by not spending time on the CF website before the show, contacting suppliers, you may miss some perfectly good vendors if you walk the show unprepared.   Additionally, there is a psychological benefit to contacting vendors prior to the show, for you go to Canton feeling that you know someone.  And when vendors know you are coming they are usually very welcoming. This will make you feel more relaxed and give you more confidence as you walk the show.  You need that confidence because not only are there so many booths to walk past but everyone is Chinese. If you are coming from Boca Raton Fla is the person who emailed me is, then you are probably going to feel like a fish out of water in China.  Whatever you can do to minimize this feeling you should do. The more relaxed you are in China, the more positive you will feel about your business there and the better will be your chances for success back home. And it all starts with preparation.

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A letter from a small business owner about his frustrations sourcing in China

I finally found one thing more challenging than sourcing in China and that is taking care of a small child all summer. My daughter was out of school in early June and when it was apparent that the summer camps I had signed her up were not going to work out, it was my turn.  So I reluctantly turned down some projects and turned off my blog for two months. Now that school has started it is time to pick up where I left off.

Needless to say there is a lot of panic about China these days. The sharp downturn in the Shanghai Composite and the impact on global economies makes for good headlines but I am not too worried. As a long time China watcher said recently, the crisis is one in the stock market, a “trading event”  and not in the economy as a whole. GDP growth is still strong in China, anywhere from 5-7% (depending on whose figures you trust, the Chinese Govt or economists at UBS). and many areas of the economy show strength, most notably wages and consumer spending, both of which are up. So what I think we will see is more instability in the Shanghai Composite over the short run but nothing that will lead to widespread panic and crisis in China. All you have to do is look at images of crowded high-end boutiques in Shanghai to know that the days of Communist-like austerity programs and widespread instability are over.

In the meantime, back to sourcing.   I had a letter from a small business owner yesterday. He is frustrated by his suppliers in China, all of whom I believe he found on alibaba.  Here is what he wrote to me.

I came across your website when searching for small business sourcing options.  I manufacture custom craft beer tap handles for breweries and restaurants across the US and Canada.  I have gone through the process of sourcing my products myself through Alibaba and needless to say I’m tired of it and looking for help.  My order size is usually 100-600+ pieces and materials used are usually cast urethane/resin, metal, or wood.  My target price per piece is typically around $0.00 including shipping costs (by air). I’d like to find a factory that I can establish a relationship with and receive reliable quality, no price changes, no haggling, and easy communication.  Any insight you can offer would be greatly appreciated.  

Regarding his desire to find vendors in China who don’t suddenly increase prices, who maintain consistent quality and who are reliable with communication, I replied to him, “welcome to the club.”  My advice to him was blunt.  If you do not have big order QTYs you will have a hard time finding vendors who want to keep your business beyond an order or two.  The reason is this: so many small overseas importers come and go in China that vendors there seldom expect to retain small scale overseas customers after an order or two. The goal therefore  is to get a first order by quoting low prices and then once the customer has committed their production to the supplier, the supplier will increase the cost hoping to cash in on a second order with higher costs.

This is not to say that the vendor who will work with the small importer in a collaborative way with an eye to forging a long term relationship does not exist. They do. But you need to find them and then work with them, which usually means travelling to China 3-4 times a year. If you are not willing to do this, the best way to manage your business in China would be to work with a Chinese agent in your own city with whom you can build a relationship. And once you have established a strong working relationship with the agent, based on your same locale and perhaps some contacts in common or possibly common interests, that agent will hopefully work with the factory in China on your behalf to keep your prices and quality stable. You pay more for your product but if in the end you can run your business, it is worth it.

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When you put your vendor on a pedestal it is time for a reality check

I am working on a project now with a vendor in China that I have known for about four years. I met this vendor at the Canton Fair and I have run a few sourcing projects by them over the last few years. They have always proven very reliable in terms of making sure they understand my clients’ product designs and getting me quotes and/or samples in a very timely fashion. And this project has been no different. However recently I sent them an email asking them to send in samples and it was about ten days before I heard anything back from them. I called and left a message as well. But to no avail. When they finally did get back to me there was no apology or explanation for the delay. They may simply have been busy with another order or perhaps they were preparing for the Canton Fair. Fortunately it was only a sample order but, boy, was it frustrating for both me and my client. At one point I was even questioning myself about how well I knew this vendor and I was preparing to reach out to alternative vendors. The lesson here is never to take anything for granted when you source in China. That seemingly trustworthy vendor you have known and done business with for the last few years may suddenly turn out to be completely unreliable. I have seen it happen many times before and it could easily have happened this time as well, had the vendor decided they were tired of working on projects with me that as yet had not resulted in any sizeable orders for them. So always have backups no matter how well things are going and when you start to put your vendor on a pedestal it is time to give yourself a reality check. I have written on this before but it bears remembering. Even I, who have doing business in China for 25 years, have to remember this sometimes.

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