If you approach a new vendor with a project and they give you a cost that seems too good to be true don’t expect you have found your partner in China for life. It is SOP among China vendors to give customers a low cost in order to get their orders. After the first order the cost will go up, sometimes dramatically, much to the customer’s chagrin. Why do vendors do this when they are aware that they may lose their customer ( and please note they are aware of this because I have asked them) ? The reason is that meeting a customer’s cost expectations is perhaps the only way the vendor will get the order. For the first order the vendor may just break even which is fine with them. They will not have lost any money and will have kept the factory busy. Their hope is that after the first order their customers will be so pleased with the quality or delivery that they will accept a price increase and place a second order. But for the overseas company that is sourcing in China and is basing its business going forward on the same low prices they received on the first order, a sudden cost increase can bring their business to a screeching halt. I have seen this happen many times and I would estimate that 30% of my clients come to me for this reason.
So what can you do about this if you are a small business sourcing in China? The answer is nothing. All you can do is be aware that this happens and to make allowance in your retail margins for an anticipated price increase from your first order to your second order. NEVER assume that your second FOB price is going to be as low as the first. If you don’t think this way you may very well find yourself in a situation where you have promised your customers that you will hold your prices only to find that your vendor in China has doubled the prices they are charging to you. You then have a choice to pass on the price increase to your customers, and risk losing them, or having to quickly begin a search for a new vendor which will severely curtail your ability to deliver product to your customer. Another thing you should do is to always have at least one back up vendor so in the event your current vendor suddenly gives you an unworkable cost increase you have someone else to go to.
In short you should think of doing business in China like coaching a football team. When you can anticipate the other team’s plays and draw up your own plays accordingly you will have a better chance of winning.
I had an interesting inquiry this week from a Chinese company I met a few years ago in China. It seems that there is a certain brand of Japanese diapers that are all the rage in China nowadays and this company wanted to see if I could help them get a full container of diapers and ship them form Japan to China. I thought this was an interesting inquiry for two reasons:
1.) It shows that Chinese consumers are becoming more sophisticated and more concerned about quality.
2.) The idea that China is buying from Japan and not the other way around shows how far China has come. Ten years ago Chinese just didn’t import products from developed countries like the US and Japan. China is different now.
Anyway, I reached out to some Japanese trading companies here with this inquiry and found out some other interesting things. Apparently these diapers are so popular in China now that Chinese and Japanese companies have been buying them up in great numbers here in Japan to ship to China. The company that makes the diapers is apparently so concerned with this that they have raised the price dramatically on the diapers here in Japan and this has led to some trading companies hoarding the diapers. . Why would they be concerned ? Well, Apparently they manufacture products in China including diapers and sell to Chinese consumers under a Chinese name. But Chinese consumers prefer the diapers that are actually made in Japan. So Chinese consumers are buying the diapers from Japan at a premium and not those made in China. Even though it is the same company.
Japanese made diapers all the rage in China nowadays. Who woulda thunk it !
I always encourage my clients to know as much about their product as they can. Not only does it project a degree of professionalism when you know in depth about your own product but the more you know about your product the less likely it is that the vendor can manipulate you on costs.
There is another reason why knowing how your product is made is important: It can actually help you reduce costs. A case in point is a current apparel project of mine. My client needs a low manufacturing cost so she can get her product in the Big Box retailers and she has asked me to find a vendor who can reach her target cost. My first thought was that we should look at the design to see if there is anything we can do to cut costs. Because the product uses a heat transfer print in one of the designs the first thing I thought of was screen printing the design instead of using a heat transfer. In China there are various techniques for printing designs on apparel including heat transfer, laser printing for some embroidery patterns, screen printing etc etc. My customer was not really familiar with these when I ran the suggestion by her. When I asked some vendors about this they told me that yes, screen printing can be cheaper than heat transfer but only if there are 2-3 colors in the design. My client’s product has about 5-6 colors so one option I gave my client was to reduce the colors in her design, maybe down to 2 or 3.
Moreover cost on a heat transfer print is not determined by how many colors but by the size of the print. Designs are printed on one large piece of special printing paper and then transferred to the apparel. One pays according to the sheet size meaning that the more designs you can fit on one sheet the cheaper your final cost will be. If one sheet costs $ 0.20 and your image is so big that you can only get 4 images on one sheet then you end up paying $ 0.05 per image. If however you reduce the size of the image so that you can fit 8 images onto one sheet then you end up paying only $ 0.025 per image. Over 1000 pcs you are saving $ 250.00. Over 8000 pcs your are saving $ 2000.00. So you can see that there are ways to reduce your costs by playing with your design.
In short, if you go to your vendor with this knowledge already in hand it is very likely they will work with you on suggestions to decrease your costs. At the very least they will respect you. And that in itself is very important when you do business in China.
I had a client a couple of years ago who could not understand why a vendor in China was not interested in his order. I explained to him several reasons which he turned a deaf ear to. He insisted that I keep contacting the vendor saying to me: “They are a business. They want to make money.” Unfortunately it does not work that way in China.
The first thing a China vendor will look at when you run a project by them is the order QTYs. China vendors want large orders because obviously the bigger the order the more money they stand to make. And this is especially the case with low cost consumer goods. For example if you give a vendor an order for 10,000 pcs, let’s say a kitchen utensil, and the vendor’s profit is $ 1.00 per pc. then that is just a $ 10,000 profit. And it may be that after some unforseen costs are added up on the production side the vendor may end up keeping just half of that. Needless to say, an order of this size is hardly worth the effort for a medium or large size factory. If however you have 50,000 pcs on the order and the vendor is making $ 1.00 pr pc then that is a more interesting order for them.
The problem here is that for most small businesses a 10,000 pc order is a big order and sometimes represents a sizeable investment, as it did to the former client I mentioned above. So what we have here is a big disconnect. A large order for a small company becomes a small order for a large factory. What the small company sees as a serious business proposal is regarded by the factory in China as an insignificant inquiry.
The key here is to manage your expectations. If you are a small business just starting out your orders are going to be small. You have to prepare yourself for a lot of rejection when you look for a supplier, whether that rejection is in the form of an unanswered email or a high quote. With those suppliers that are interested in your business ( and make no mistake about it there will be some) you have to proceed carefully. Vendors that accept small orders are likely vendors who do not have a lot of orders – if they did they would not be interested in your QTYs. Vendors who do not have a lot of orders are probably not good vendors, low cost, low quality vendors as I refer to them. With these vendors you can still build your business but you will have to manage them and monitor quality very closely. It may be that every order you will need to inspect in China. At least if it were my business that is how I would do it.
I have a new project sourcing suppliers in Mexico and Latin America ( I use the term Latin America here in the wide sense to include South America and all coutries where Spanish or Portugese are spoken). This project is on behalf of a client whom I had helped before, with some success, to find vendors in China and Indonesia. So they came to me and asked me to help them now in Mexico. I must admit that it is a new experience for me sourcing suppliers in Latin America. But already I have found it interesting. One big difference is that many suppliers in Latin America do not have English versions of their websites. In China most vendors have an English page. Let’s just say that I wish I had paid more attention in my 4th grade Spanish class.
Although I always advise against using alibaba to meet vendors, for the simple reasons that you really have no idea who someone is, the low costs are often tied to astronomical MOQs and there are probably a lot of agents posing as factories there, I do nevertheless find alibaba very useful for gathering info. I can sometimes get an idea of where suppliers for a certain product are clustered ( one way I use alibaba) and as is the case with the current project I can tell which countries in Latin America might be useful to target. You can do a search by global region, eg. Europe, Asia, The Americas etc and find out how many suppliers there are in each country in that region. So I can look at Latin America and get the breakdown of the number of suppliers for product A by country. I then know which countries to target and which to ignore. In this case Mexico and Brazil are the countries to target and the other countries are not worth my (or my client’s time). Some countries may have only a few suppliers listed on alibaba.
Another way to find out which countries might be worth targeting is to look at trade shows by country. I found for example that only Brazil and Mexico have substantial trade shows. Many of the other smaller countries in Latin America and even some of the larger ones may have just a few trade shows a year across all industries.. This is not to say you cannot find product there. Of course you can, but the lack of global commerce probably signals a lack of infrastructure. And a lack of infrastructure may not allow you to export your order smoothly It will just have the result of adding a lot of costs as your product travels down the supply chain.
Generally when you are getting samples from China vendors for a new product there are three samples you want to be concerned with. Sometimes people confuse these terms so I thought I would clarify them.
Proto samples. are samples of a product where the design has not yet been fixed. For example I currently have a customer who has a concept for a new product. I gave some specs to a vendor in China whom I have worked with before and the vendor did some samples for me. The samples are rough but they will give my customer something to build on. Sometimes it may take two or three rounds of proto samples to get a sample and product you are pleased with.
Pre-Production samples. Once you have approved a product or design, you request samples from the vendor for approval. These are Pre-Production samples and should mimic production. However, from my experience, even pre-production samples sometimes need a couple of rounds before the vendor gets it right. Ideally you want the vendor to submit multiple pre-production samples to you so you will have plenty in the event you send someone to China to do an inspection or if go yourself (advisable). You also send some of the approved samples back to the vendor with a date and signature so they will have a standard for production. Some vendors are very sloppy about keeping counter samples so you need to discuss this with them and insist on it. Just remember it is always better to be stuck with too many samples than too few.
TOP or production samples. Assuming you are not in China for the production and your vendor is proceeding on his/her own, you need to ask your vendor to send you samples from the first lot of production This will allow you to see that everything is going as per the approved samples ( you would be surprised how often it doesn’t ) Ideally you would want the vendor to stop production until you have approved TOP samples, but of course most vendors are not willing to do this, especially if they have other orders to do. Still insist on the TOP samples, have your vendor FEDEX them to you and let them know if anything is remiss ASAP. You might even draw it into your sales contract that TOP samples must be sent and approved before the bulk of production can be started. Depending on the vendor and how badly they wanted your business, they might agree to this.
A final thought: Always have your vendor label your samples clearly and preferably in marker and not with a tag. Tags fall off. Ink does not. Anyone who has dealt with as many samples as I have knows how easily samples can be mixed up, misplaced, lost, or simply mis-tagged. The best way to prevent this is with a marker.