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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Never think you are a big fish when you source in China

If you are sourcing in China you have to remember one very important thing:  that your product may not be a priority for the vendor with whom you have placed an order.  Most factories in China, big and small, have a myriad of production orders going at any one time.  Walk into any workshop in China and you will likely see orders from all over the world, from the US, from South America, from Africa etc etc. I am always amazed at the global scope of production when I visit factories in China.  And some of these orders can be huge, tens of thousands of pcs depending on the product. You might think your 5,000 pc PO is a big deal but for your vendor it may only be a small order when compared with all the other orders he/she is doing at the moment.  I remember working on an apparel project a few years back.  The company that had retained me sent me to China to do an inspection of a 20,000 pc order.  For my client it was major order.  But when I showed up at the factory I realized that my client’s order was the smallest of several orders going at the same time.  The vendor told me that 20,000 pcs was not a big order and as such I could clearly see that it was not being given priority by the workers or management.  They told me a big order was over 100,000 pcs.  I was surprised and wondered if my client knew this as well.  I can’t remember but I don’t think they did.

Can you fault the vendor in this case ?  Not really.  They have to prioritize their orders and their business. It is only natural that they are not going to give a small order priority over a large one.  Ideally they should communicate this to their customer but in China it does not work that way.  Vendors can be pretty lacking in communication and that is one of the big challenges to sourcing in China. Can I fault my client ?  Somewhat I think because they failed to acknowledge that the vendor had other orders at the same time, even though they had been to the factory, just a few weeks before I was there, and had seen the other orders in process.  They simply believed that their order counted most. So when it came time to get the order out and the vendor was behind my client just pushed the vendor, the end result being that the relationship turned sour.   Had my client anticipated a delay and built some extra time into the production and delivery schedule to accommodate for the low priority their order was given things might have proceeded more smoothly.

So how can you know if the vendor is prioritizing your order or not ?   Well the first step is before you do business with a China vendor, ask them about the size of their orders and what they regard as a small order, what they regard as a big order etc etc.  They will probably inflate these numbers wanting to lead you to believe they have and can do big orders.  But their reply will nevertheless give you a very rough idea of what to expect when you place an order with that particular vendor. For example, if you meet a vendor at the Canton Fair who makes shoes and s/he tells you that an average order for him is 5000 pairs of shoes and that a big order is 20,000 pairs, you will know that if you give them an order for 1000 pairs, it will likely not be a priority order for them.   You might even ask a vendor to show you a hard copy of an order for a large QTY.  You can tell them that you just want to verify that they can do what they say they can do.  And ask a vendor before you place an order what other orders you are going to be competing with ?  For some reason this is not a question that most importers are in the habit of asking their vendors, their thinking being that only their order counts.  But I don’t think it is a bad idea to try to find out what are going to be the challenges and potential delays once you place your order.

Finally, if you can, make a trip to China to inspect your order in process.  Simply by walking around a workshop while your order is in process will give you a very good idea of how a vendor is prioritizing things.  If only a little space is being devoted to your product, well, you know you have a problem in spite of your vendor’s reassurances.

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How to get started in China sourcing

I had a call yesterday from an old client of mine, a company that sells a very popular line of kids bags ( I see them all around town here). The woman who started the company sent me to China several years ago to attend the Canton Fair on her behalf and now her husband, Richard, has joined the company. This company is typical of many small companies and start ups I have met over the years. They start their business with the aid of a China sourcing agent and the scope is small for the first few years. But then as the product starts to take off the company becomes more sensitive to quality and cost and they begin to outgrow their sourcing agent. And it sounds like this is what is happening with this company.

Richard will be in charge of sourcing and vendor management and he called to pick my brain on China. He said that that the company now uses just one supplier and although that supplier has been pretty good in terms of quality and pricing, there have been issues. One issue is they really know very little about the supplier as the orders are handled by a middleman. I sensed in listening to Richard that this was a typical scenario as I have outlined above; the company is growing and wants to have more control over pricing as their orders get bigger. Using a middleman, however, means they have less control. Still, I advised Richard not to bite the hand that feeds you. This middleman has helped grow the business to what it is now, a very successful company that is on the verge of national brand recognition. But, I said, if the frustrations are growing in the relationship it is time to start looking for other vendors. There is nothing wrong in doing this and, in fact, you never want to limit yourself to one supplier or one agent.

Richard asked me if it was a good idea to put together a list of vendors in China and to make a trip there. This sounds good but it would be hard to make such a list using alibaba and global sources. These sites really don’t tell you much about vendors and you really have no way of distinguishing who is a manufacturer and who is a trading company. I would add that unless you really know China I think it would be hard to draw up an itinerary for a sourcing trip where you are visiting vendors for the first time. One vendor might be in location A and another in Location B. The distance on the map may look close but in fact it may take a full day to get from A to B because of traffic and poor roads. I speak from experience. I used to make itineraries for China trips but they seldom went as planned. There was always the unexpected to deal with, a road that was under construction forcing you to take a lengthy detour, an un-scheduled power outage, the unannounced unavailability of a vendor you had gone to visit, inclement weather esp in the summer. When you travel to China to visit more than one vendor, you should give yourself plenty of time, building in at least 2-3 days per vendor visit, not including travel days. For a first trip to China putting together a list of potential vendors and attempting to visit them would not be the way to go.

Instead I told Richard that he should go to the Canton Fair or the Hong Kong Sourcing fair which are held concurrently twice a year, in April and October. These fairs are the best introduction to sourcing in China for small businesses. The value in attending the Canton Fair, for example, is that you don’t have to trapise all over China to meet vendors. They are all right there in Guangzhou for you. Of course there are many vendors to avoid at these fairs, vendors you just do not want to deal with. But there are good vendors as well. At the very least you get a lot of feedback on your product and you will arrive at a truer understanding of your product design and cost by virtue of talking to so many knowledgeable people about it. You will also be able to see many other products on display which will aid your company’s own product development.

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Using online payment systems when you source in China

Until recently whenever you wanted to pay a sample fee to a vendor in China you would have to send a bank wire. Service charges for a wire transfer run between $30.00 -$50.00 and the wire can take up to a week to go through, although the ave time is 2-3 days. Not to mention the fact that you have to spend time to go to the bank and do all the paperwork for the wire transfer. Nowadays however, more and more vendors will accept Paypal as a way to pay for samples. I would say that whereas two years ago maybe one in ten vendors would have accepted Paypal, now it seems that about 50% of vendors will accept PayPal for sample fees. The advantages for you, the buyer, are obvious. Paying a vendor thru PayPal will save you a lot of time and a little money. PayPal also protects you if do not receive the samples or if the samples are not what you were expecting.

However, all this is not to say there will not be problems. A case in point: I have a client now who is ordering some samples from a vendor in China. This is a vendor who accepts PayPal. Last week I had an email from the vendor telling me that the samples were ready to go as soon as the sample fee was paid by my client. So I told my client who wrote back that he had already made a PayPal payment to the vendor several days previous to the vendor’s email. I checked again with the vendor who told me that there was no record of the PayPal payment from my client. We went back and forth for a few days and finally discovered the problem which was simply that the vendor was taking PayPal payments through his gmail address. However since Google is persona non grata in China the payments were not going through. So the vendor had to register another email address with PayPal and overall we lost about 4-5 days because of this. PayPal in China still has growing pains.

One other method of payment that many vendors accept nowadays is alipay which is Alibaba’s online payment system, and the largest payment system in China. Many vendors who sell on taobao.com (China’s equivalent of Amazon) use alipay as their payment system and the reviews are generally good. However, I would not recommend you use a China based payment system to pay for your sample fees for the simple reason that if you have a problem it may be hard to resolve it. If for example a vendor accepted alipay or wire transfer I would probably just opt for the wire transfer, time consuming as it is.

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When sourcing in China, find yourself a China expert

Most of the small businesses or micro businesses aka startups that come to me are on a budget. When I tell them what I charge for a sourcing project, a fraction of what other sourcing agencies charge, I am sure they are thinking “why should I pay this guy to put together a list of vendors for me when I can just go on Alibaba and find some vendors on my own. “ If I were starting a business that is probably how I would think as well, for Alibaba is just so easy to use when you are trying to find a supplier in China. In some ways I have no problem with this because when you are just starting out you need to be prepared to do everything yourself, to wear many hats as the expression goes. But let’s say I was sourcing something in Brazil. How confident would I be looking for a vendor in Brazil when I did not speak any Portuguese and could not even say so much as hello in Portuguese. The answer is not very. I would be limiting myself to a handful of vendors who spoke some English not to mention the fact that I would be doing business in a country whose language and culture I did not understand, which, common sense tells me, would lead to big problems sooner or later. I would have absolutely zero confidence placing an order with a vendor in Latin America without the expertise and advice of someone who had done business in Latin America. And figure that China is a hundred times more difficult a place to do business than Latin America. But I think the best analogy is buying a house. Buying a house is a complicated process and is often the single biggest investment in one’s life. And even if you know a lot about real estate it is probably not advisable to dispense with the services of a Real Estate agent when buying a new home. And most certainly not if you were a first-time home buyer. So if you want to start importing from China, find someone who knows China. It will cost you some money but it may end up saving you a lot of money over the long term.

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The McDonalds of China sourcing

A start up apparel company was running a project by me this week. They have their designs and want to start sourcing in China. Needless to say, they want to order in very small QTYs and they wondered if sourcing on Alibaba was a good way to go. In general I do not advise sourcing on Alibaba because you just never know who you are dealing with and I have never met anyone who sourced on Alibaba who was not looking for a new vendor after six months. I like to think of Alibaba as the McDonalds of China procurement, in other words good for a quick order but not a healthy solution over the long-term.

The value of Alibaba as I see it is that it can give you a general idea about cost, MOQs and vendor location. I use it sometimes as just that, a research tool. If for example I want to find out where denim vendors are in numbers then I can easily do so with an advanced search on Alibaba.

And when giving it some more thought this week, as I prepared my reply to the startup that had emailed me, I realized that Alibaba is good for this: if you want to bring a design to fruition and get an idea of costs you can always find someone on Alibaba to do some samples for you. In other words, if your goal is simply to get started Alibaba is OK. And that is what I advised this company. I wrote to them as follows:

“….if you are just starting out and don’t have the budget and simply want to take a product from rough sketch to prototype then Alibaba is a good place I think.  You can at least get some samples made and perhaps a small production lot that will shed new light on your product and or design and give you a good idea of how much it will cost you to make your product. And you may be able to fulfill a small number of customer orders. But I would not go into any Alibaba sourcing project thinking you are going to find a vendor who is going to fulfill large orders with exacting QC standards for you. When you know that you really have a business, and are selling to specialty stores, if not big retailers, then that is when you really need to hit target costs, get product delivered on time and keep QC issues to a minimum. And that is when you need to look beyond Alibaba to more long-term partners.”

Here are some other posts on Alibaba

Sourcing on Alibaba

Alibaba as research tool

Four Maxims that will help you succeed in China

Sometimes I have found that I come up with catch phrases when giving advice to people who want to source in China so I thought I would publish a few of these here today. They are easy to remember and reflect some valuable wisdom acquired over the past 25 years.

1.) The best way to work with a problem supplier is to avoid them altogether. I get emails from people all the time who are having problems with their suppliers and it usually comes out that the person did not really research the supplier fully before giving them an order. In many cases the supplier is just someone the person met on Alibaba or another internet site. I often think the best way to find a good supplier is to eliminate as many bad suppliers as you can. You do this by doing your Due Diligence (DD).

2.) Work with your vendor, not against them. Too often people who source in China have a mindset that their Chinese suppliers are there to serve them and that they (as the buyer) can dictate the terms of the relationship. Wrong. Mutual respect is the basis for any successful relationship in China and you have to show your vendors respect at all times. When you have problems don’t look for blame. Look for solutions (this reads like another good maxim in and of itself).

3.) When doing business in China you need to be patient. And when you think you cannot be patient any longer, you still have to be patient. Patience is the one virtue you need more than any other when you source in China. When you rush your orders, rush your vendors that is when problems happen. So give yourself plenty of time on your orders. And, more importantly, give your vendors time.

4.) Be Calm, Be Clear, Be Polite, Be There. I had a customer once who had a lot of experience in China, having sourced there for years, but she found that this rhyme really summed best what it takes to succeed in China so she printed it out and put it over her desk. If you are sourcing in China, you should do the same.

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Ordering in small QTYs when you are starting a business

I have a client who is starting a new line of private label products and he wants to order in small QTYs from China, the goal being to see which products do well and which products do not  before he pours a lot of investment into anything. These are low value added products which retail at under $ 20.00. He sent me a list of about 10 products and the QTYs he wants to get from China are from 250-500 pcs per item. I like my customer’s common sense here, for I think in any China sourcing project it is good to start small, no matter what your projections or gut feeling may say. At the same time, often what gets a vendor’s interest is large order QTYs so an order of 250 pcs may have few takers. And if someone did take the order, it would not be a priority. The one exception would be if my client had a longstanding relationship with one factory. In this case the factory would willingly take the order because they would view it in terms of the larger relationship. Getting factories with whom you have done business over the years to take small orders is rarely a problem. But my client is starting out so he really does not have these kinds of relationships with factories in China right now.

For this reason, I have advised him that it is best to work through a trading company with this order, and one that specializes in the type of product he wants to import. In addition to run-of-the-mill trading companies that run the gamut in terms of what products they sell, you will find trading companies in China that are dedicated to one product category only e.g. auto parts, to stationary items, to toys, to baby products etc. I worked through a trading company once that specialized in silk flowers and automotive parts. It is an odd pairing but it worked for me because I was sourcing silk butterflies for a company in California. Had I been sourcing refrigerator magnets it probably would not have worked. So if you are looking for a trading company, it is good to remember this. Because the last thing you want to do is unknowingly give an order to a trading company that really has no expertise in the product you are interested in. You have no way of knowing this unless you do your research.

At the same time working through a trading company means that my client will have to lower his product standards considerably. Because trading companies are not the primary manufacturer and cannot be expected to attach importance to any but the most basic quality requirements of the customer one has to lower their standards accordingly. So when my client is already voicing about how he can tweak this or that on a product or how he can improve quality, I told him, forget about that. You are just ordering 250 pcs of something with minimal value. Right now just see if you can get these products out of China with your own label at a cost that works for you. Once you do that you can gauge the interest in the market. Even if a customer buys something and returns it for quality issues, my client will have seen that there is interest in the product, which I think is his goal now. When he knows which products garner interest and which do not he can then start thinking about bigger QTYs and approaching factories directly with orders that will get their interest. And then he can spend more time thinking about product quality and design.

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When you ship out of China just think FOB

I had an email a couple of weeks ago from someone who wants to ship an order DDU out of China. DDU stands for Delivery Duty Unpaid. It is actually an outdated term having been replaced several years ago by DAP Delivery at Place. In a DAP transaction the seller is responsible for all costs up to the point where the product is delivered. If for example the goods are going from Shanghai to Columbus, Ohio the seller would be responsible for all costs up to delivery in Columbus, with the exception of Duty and administrative costs to get the goods from the port in the destination country to the final destination. This sounds a lot like CIF, the difference being that in a CIF transaction the seller is responsible for the cost to deliver the cargo to the destination port only. At that point the buyer takes over and assumes all costs up to the point of delivery.

Since I have never known anyone to ship an order out of China that was not FOB, and since I know that Chinese vendors do not want to assume risk, what a DAP transaction involves for a seller, I was a little skeptical when I heard about this order. I went online to do some reading about DDU transactions and realize that the only reason a Chinese vendor would consent to DAP is that it allows them to add costs to the project; the vendor selects the carriers and pays VAT and other charges up to the place of delivery. If the vendor is in cohoots with a forwarding company in the US then the charges to deliver the product from port to destination could be excessive. And if you don’t pay those charges they will not deliver your order. Of course, for a first time buyer out of China who has no logistics experience or agent to work with DAP might sound like a very easy solution. But in fact DAP could be both expensive and problematic.

In general anytime you order out of China you really should be looking for FOB terms FOB stands for Free on Board and the seller and buyer share responsibility equally, the seller up to the port of embarkation of and the buyer once the goods have been loaded on to the vessel designated by the buyer or their shipping agent. If you approach a vendor in China and they suggest other then FOB, be skeptical and do some research. Of course there are exceptions to FOB but they are rare for small importers.

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Looking for a bank to handle your China orders

Someone asked me the other day about setting up a bank account before they start sourcing in China. They wrote as follows: “Are there certain features or account types that are particularly useful to make transactions as efficient as possible?” This is a good question and the short answer is no. I told her that the main thing was to look for a major global bank that has an office in China e.g. Citibank, HSBC, etc. The reason is that there are often problems with international transfers and it is helpful if you have a bank in China to unravel the knots, so to speak, In fact, I would say about half the time that my clients send payment to China there is a problem with something, usually on the paperwork. For example, sometimes a SWIFT code or beneficiary address may be wrong and it can take a few days to straighten out. All the while your sample or production order sits on your vendor’s desk even though they have assured you they are working on it. In fact vendors never start on a project until they get paid. Even if they tell you they have started you can pretty much be sure they have not. So getting a payment to a vendor in China ASAP should be a priority.

So if you have a regional bank that you use for your business and you are thinking about sourcing in China it probably is a good idea to look for another bank that has more international reach and experience.

All banks charge wire transfer fees and you should not be too concerned about this but instead should see it as part of your overhead. I had a customer once who really balked at paying wire fees. She did not want to pay a $30.00 wire transfer fee on a 10 K order. I understand that overhead is a major concern for any small business owner. But considerations about overhead should never take sales off the table. Some banks may have more beneficial rates and a wider range of business services, but are they set up to handle your China business is a question you need to ask.

Another expense to consider is postage fees to get samples back and forth to China. The last four years of helping small businesses and startups source in China has taught me one valuable lesson, never rely on regular air-mail or express mail from the US or Canada to send samples to China. Half of the time they never get there. When sending samples, you should use a major international carrier like UPS, FEDEX or DHL. This is the only way to ensure that your package will reach its destination. Once again, the idea is to use someone who has reach in China. FEDEX does. USPS does not. One of my customers sent a fabric swatch to a vendor in China using USPS Express mail. It cost him $50.00 and it never got there.

Needless to say sourcing overseas can get expensive. These are all “hidden” costs but If you want to source in China, or another country, you have to absorb them.

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