If you are confused when you hear OEM, you are not the only one.

One of the more confusing terms you hear when you start to source in China is OEM. OEM stands for Original Equipment Manufacturer. It was first used widely in the computer and automotive industries where component parts (numbering in the thousands) were supplied by many different manufacturers and these manufacturers were referred to as OEM suppliers. OEM was simply a term coined to designate the manufacturer of the component part as opposed to the manufacturer of the  product as a whole. Apple Computers for example, manufactures computers made up of thousands of parts. Although Apple may manufacture some parts themselves e.g. computer cases,  most parts, for example. motherboard components are provided to Apple by outside companies which specialize in the manufacture of these parts. These then are known as OEM suppliers.

These days however OEM pretty much refers to any supplier in China, whether they are selling parts or finished goods, In fact most companies you see on Alibaba advertise themselves as OEM suppliers, even those that are really no more than trading companies. So that is one change: Whereas OEM used to refer strictly to a parts it now refers to a part or a finished product if that product is going to be rebranded or sold under private label.

Another change in the meaning of OEM is that it now as often refers to a buyer as it refers to a supplier. If, for example, I buy some toys from China and resell them under my brand in the US I am engaged in the OEM business. In fact, the term OEM, it seems, has really come to be synomous with sourcing in China.

In short, OEM is at once so widely used and yet so confusing that I do my best to ignore it whenever possible. If you are confused then do as I do and pay no attention to OEM.  Using the term adds nothing to your conversation with your supplier and often just comes across as jargon.

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5 questions you need to ask yourself before you source in China

The other day I read an interview with former GE CEO Jack Welch. In the interview he said of China “ China is a very difficult place to do business and you can’t just use simple Western techniques.” I love it when I read these things because as I like to say, if it is that difficult for GE to do business in China, imagine how difficult it is for your garden variety Main St. USA small business to do business there. You just cannot expect not to have problems in China if you do business there and that is why you have to ask yourself a lot of questions before you begin your China sourcing. Because, in fact, if you are not careful you may find that sourcing in China becomes far more expensive than you had anticipated and you put your business at risk. So some of the questions I think every start up or small business owner should ask themselves before they get involved in China are as follows:

  1. What is the true landed cost of my product ?  Landed cost is the cost of the production, inspection, and shipping.  When you consider all these costs your unit cost may go up considerably and well beyond your target cost. I think too many people look at product cost alone and think they have a business. I can remember working for a furniture company and pricing out some chairs for a large retail buyer.  The first cost ( the cost of the product alone) was very good but by the time we added in the shipping costs the project was not viable. The reason: Chairs are bulky, they damage easily and you need to pack them very well. Consequently it is very expensive to ship them from overseas.
  2. What are the packaging costs ?  When you get that quick quote on Alibaba, it does not include packaging.  Retail packaging can be expensive and you need to figure this into your final product cost. You may find that it costs you $0.50 to put packaging on a wholesale $ 3.00 item. Needless to say, that just does not seem worth it.
  3. Who is going to do my inspection in China? Am I prepared to travel to China to do my own inspections? And how much is this going to cost ?  The only way to minimize risk when you source in China is to check the product before the vendor loads it into the container.  Needless to say, if you have a 50,000 pc order and it costs you $ 10,000 to fly to China and inspect it yourself, you will have to add $0.20 to your product cost. So let’s say $ 0.20 for the inspection, $ 0.50 for your creative retail packaging and another $0.25 for shipping. Before you know it that $1.00 you thought it was going to cost you to get a product from China has quickly become $ 1.95, almost twice what you thought.
  4. How much is it going to cost to retain the services of a shipping agent?  International shipping is far too complex to do it on your own.  Any small business that wants to source overseas needs a logistics company or shipping agent. These are the guys who book the vessels and clear customs for you. They can save you a lot of money and you should see them as indispensable to your business.
  5. What product safety requirements does my product have and how much cost is this going to add to the product to have the vendor comply? This is a very important thing to consider. Vendors have different grade materials for different markets.  Usually the stricter the environmental/safety standards, the more expensive the product is.  Sometimes the cost of the product will double if the buyer requires a top grade material.  But if you are selling in a market with these regulations you need to meet them.

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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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Some valuable lessons from a China sourcing project

I just finished a project helping a start up apparel company find a supplier in China. This company is showing at a trade show this month and they just received the show samples which they were very pleased with. The vendor I set them up with, a vendor I met in China a few years ago, has been great to work with. They have been very responsive and worked effortlessly to get samples to my client in time for her show. It was close though. My client did not communicate her show sample needs to me immediately the result being that we had to grapple with month delay because of Chinese New Year and ran the risk of not getting the samples in time.

Reflecting on the order yesterday I told myself, yes there are valuable lessons to be learned on almost every order it seems. Accordingly here are the lessons on this order:

1.) As soon as you know your show schedule and your sample needs communicate those to vendors or agents or anyone you are working with on the order. In general you should give vendors three months to get samples ready for you. That may seem like a long time but remember vendors are busy people and have other customers as well.

2.) Check the calendar of the country where you are sourcing and look for major holidays which might mean hiccups in production or delivery. In China, for example, you do not want to schedule anything, samples or bulk production, around CNY or National Day. These are not garden variety national holidays but major holidays that usually result in 2-4 week work stoppages. In the West, or Japan, a holiday means a few days off. Not so in other parts of the world.

3.) Don’t stop when you have found a good vendor. The client I refer to here is a small business. The vendor I have set her up with is a big factory that can count Disney and the Gap among their customers. I would not normally set up a small business with a big factory but this vendor is very responsive, professional and can give my client a good cost based on economies of scale. I have also met them and have established some rapport with them over the years. This is not the first project I have run by them. Having said all that I have told my customer that in order to keep the vendor’s interest she will have to increase her orders over time and establish a good working relationship with the vendor. Hopefully the samples she just received will go a long way in helping her do that. But at the same time she should be looking for other vendors in the event she is not able to increase her orders to the satisfaction of her vendor.

And this is the model you follow when you source in China. Always.

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Are Mexico and Latin America really an alternative to China ?

I have a project currently sourcing some home décor suppliers in Mexico and Latin America. And I must admit it has been harder than I thought it would be. The main reason I think is language. I have looked at the websites of 10-15 trade shows in Mexico and Latin America and I think only 2 or 3 had English versions. I was quite surprised by this because some of the shows look to be rather large in scope and are advertised as such, albeit in Spanish. And of the 50 or so websites of companies I visited I would say that only about 10% had English language versions of their websites. Nevertheless I learned the requisite Spanish to describe the product I am looking for and I emailed a handful of vendors in English assuming they would have someone who understood English and would get back to me but that so far has not been the case. The response has been nothing short of dismal. The response rate has been about 5%.

Of course this is just one project and just because vendors have not replied immediately does not mean I should cross them off my list. I do think there are probably some good suppliers for my client in Mexico or Latin America. But finding them will be far more difficult than were I looking in China. In China most companies have English versions of their websites and some staff who speak pretty good English. You will not find a big trade show in China that does not have an English language version of their site. And if I emailed 50 vendors out of the blue I think about 30 would get back to me within 48 hrs. And this is one reason why China has become a truly Global Player.

To source effectively in Mexico you probably have to spend a fair amount of time in the country visiting trade shows and suppliers and going back often to supervise production. Of course this is what I always preach to companies that want to source in China as well. However, I think the difference is that China vendors are far more responsive, just move a lot more quickly (obviously) and they somewhat understand the concept of Customer Service. For this reason, I think small to medium sized consumer goods importers in the US and Canada who are looking at Mexico and Latin America with the goal of shortening their supply chain probably need to stay with China a little bit longer.

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China Sourcing: How to do it right

I get inquiries all the time from people who have ideas for products or businesses. But I often find out that they have not really thought these ideas through. For example, I got an email the other day from someone who wants an exercise product manufactured in China. He has well-formulated ideas about retail costs, margins and marketing on his side. But he has given very little thought about costs on the manufacturing side. Nor has he considered shipping costs. For example, he asked me if I would approach some vendors in China on his behalf but he did not have a target cost for me. I then had to explain what “target cost” is. My reply to him is below. I think it might be useful for other entrepreneurs out there who have product ideas and want to source in China.

By target costs I mean as follows:

What is the cost you need to pay the manufacturer in China that will allow you to turn a 31% profit on your product after all the other costs as you have detailed below have been taken into consideration. The idea here is that you really need to understand your own product and your business so as to reach a solid understanding about what your manufacturing costs need to be in order to meet your retail margins (31%). I suggest you really cost this thing out and come back with a target cost that I will be happy to pass on to a couple of vendors in China. But please note this cost has to be accurate. You cannot approach a vendor with a target cost of $ 10.00, for example, and then two weeks later come back to them and tell them you made a mistake that and that the new target cost is $ 8.00. If you do that you just can’t work with that vendor anymore.

You would probably ship these by air or LCL ( Less than Container Load) depending on volume. I have no idea of the rates but for LCL but I imagine shipping would add on $ 0.25 per pc. Just an estimate because I really do not understand your product yet. You also should look into working with a shipping agent there in London becuase shipping documentation is both essential and cumbersome.

Anyway, don’t get too far ahead of yourself. It sounds like you really need to do a lot more work as far as product design and cost goes. I won’t approach any vendors until I have some solid specs, as per what I sent to you as an example, and a firm, well thought-out target cost. The goal here is to come off as professional as possible so vendors want your business.

Ex China means before the product leaves China. When I say you need to inspect your product before it is EX-China, I simply mean before it leaves China.

Manufacturing cost plus shipping cost equals landed cost. And then you also need to figure in the costs for inspections. Just look at this thing from all angles.

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