Three useful tips on doing business in China

I was reading the China Business Review the other day there was an article about protecting one’s IP in China.  The article was written by the founder of a small company who took his production to China in 2009 and who has experienced the ups and downs of overseas manufacturing. Although the article mostly details the challenges in finding a Chinese partner who is going to respect your IP, there is a lot of useful advice that pertains to sourcing in China as well.   Among the valuable lessons imparted in the article are as follows:

  • Confirming that your partner has the expertise to do your product. I think this is good advice. Too many people just assume a vendor can do a product because the vendor has assured them they can.  And how do you confirm ? Of course samples are very important and you never want to go with a supplier that cannot give you a near perfect sample.  But you also need to visit your prospective supplier’s facility to make sure they are not simply subcontracting your order out and that they have the capacity to do your orders.  And remember good samples is only a start. You need to ensure that your vendor will sustain your quality standards during production. And the only way to do this is with an inspection of the goods before they leave China
  • Clear and frequent communication.  The author of the article details how some of the poor prototypes he ordered early on were not as much the fault of the Chinese factory as they were the fault of his company who often provided insufficient product details.  This rings very true.  In fact, most small companies that source in China tend to omit important product details, simply because they do not understand their own products and/or are assuming that vendors will fill in those gaps on their own. As I often advise people, never make assumptions when you are doing business in China.  Tell your vendor everything.  And regard communication with your vendor as perhaps the most important aspect of your relationship, equally as important as cost and quality.
  • Have someone on your team who understands Chinese. The author hired a translator for their meetings in China. However, when 20 minute conversations in Chinese on technical and legal issues were being reduced to 30 second summaries they decided that far too important content was not being delivered to them.  They saw the need for a company employee who understood Chinese.

Here is a link to the article. China Business Review article 

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Drop Shipping from China

I have gotten a couple of inquiries lately about drop shipping from China. Drop shipping, where the distributor or factory ships directly to a retail customer, is a of course a way to cut lead time and reduce costs substantially and at least here in the US it works. Drop shipping is a common feature of e-commerce nowadays with sites like EBAY and Amazon and even with many brick and mortar retail stores. But drop shipping out of China ? Hmmmm..I don’t think we are there yet.

One company that called me is an industry leader in a minor category of apparel and they wanted to ask me about finding a supplier in China who could drop ship to their customers in the US. They said they have a new CAD program which will allow customers to design a garment online and the factory in China will make the product from the online specifications as entered by the customer. I asked them what happens if what the customer orders is not what they get and they replied to me that would not happen because all the specs are there for the customer and vendor to see. The guy I talked with was insistent that there was no margin for error. This is a real company and theirs was a serious inquiry so I listened to them, politely. But all the while I am thinking to myself “these people do not understand China.” There are a few problems with this idea as follows:

  1. In overseas manufacturing something can always go wrong, no matter how simple the product seems. And, far from being simple, garment manufacturing is no walk in the park. I know because I used to work in Home Textiles.  Drop shipping garments made in China to individual customers in the US seems like it would be fraught with problems.  I can see massive returns based on incorrect sizing, color or quality. I mean, just because you show the vendor where the stitch goes does not mean they will put it there. As a vendor once said to me when I told him he should be able to find a solution for a simple problem we were facing “sometimes the easy things are the most difficult.”
  2. Few Chinese companies that I know of are going to be interested in doing orders like this. One reason is that it takes a lot of time to set up a production line and factories do not want to do it unless the order QTYs are large.  Although the US Company said their solution would be to bundle the orders so that factories were given an order for, say, 1000 units a month, it just would not be a big enough order to get many Chinese companies interested.    I should say here that a lot of small companies that come to me have ideas for products and they get very excited.  They think that all they have to do is to find a factory in China to make their product and they have got it made. They expect the factories they approach in China to share their enthusiasm and they don’t understand when the factory does not.  But factories want big orders.  They don’t care what the product is. They just want volume, because that is where they make their money, and if you can’t offer that to them, they just are not interested.
  3. The cost to send one garment from China to the US via an international carrier such as FEDEX or EMS, is from $30.00-50.00.  Needless to say that adds a lot of money to the product and I don’t think there are many customers who are going to be willing to absorb that kind of shipping cost on a $25.00 product.  And then when there are returns the cost goes up even more. No one is going to want to absorb that cost, neither the customer nor the manufacturer.

As I said, these are serious companies and one company even offered to fly me out to Denver to discuss the project with them. But I knew I would just be going there to tell them that they did not have the right idea about China, and that an idea to drop ship from China to the US was just not a smart idea, and not one I wanted part of,  so I politely declined.

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Considering the cost of an inspection – in China and in the US

When you do an order in China, don’t forget that it WILL be inspected at some point. The four possibilities are as follows:

1.) The vendor inspects the order.
2.) You inspect the order in China or at your warehouse.
3.) You have a third party do the inspection in China.
4.) If no one inspects the order ultimately it will be your customer who does the inspection.

# 4 is obviously what you want to avoid at all costs.

# 1 is also not a good option because most vendors cannot be counted on to do a good job of inspecting orders. They often do not understand the quality standards of the markets they are exporting to and they are interested in shipping an order ASAP so they can get paid.

So basically it comes down to # 2 or # 3. Let’s look at both.

# 2 – If you inspect the order you can do so when it gets to your warehouse or you can inspect at the factory in China. There are costs associated with each. If you inspect the order at your warehouse you have to pay and in some cases train workers to do the inspection and then you have to pay them to repair defective units. So if, for example, you get a 10,000 pc order from China and you have to inspect it and repair a significant amount of product you are looking at major costs. Not to mention the costs you will incur from lost sales and frustrated customers. I have one customer who has spent hundreds of hours over the last year repairing a big order he received from China. It seems the vendor forgot to trim a part of the product so my customer has to do this himself. I imagine that whenever he has a spare moment he goes into his warehouse and does a few more pcs. I cannot put a price on his time but I am sure it has cost him thousands of dollars to do this.

If you inspect the order in China, you simply need to pay your travel expenses to China. The factory will repair all defective units on site and will not charge you for these repairs. You may end up hanging around the factory for a week but you will be able to sleep at night knowing that what is going to be delivered to you is what you ordered.

# 3 – In some ways using an inspection company is a good alternative to making the trip to China to inspect yourself. Most inspection companies charge $ 150.00 – $ 300, 00 per day per inspector. The only caveat with an inspection company is that they really do not understand your product like you do. For any design-driven product, using an inspection company is probably not the way to go.

When all things are considered there is much to be said for just hopping on a plane and going to China to do the inspection yourself.

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How to do an inspection in China

Doing an inspection in China is really nothing more than looking in cartons to figure out if what the vendor made is to spec. Depending on the size of your production order you can inspect 100 % of the order or a part of it. Usually however, the size of the order mandates that you inspect only a part of it. For example, it is simply not possible to inspect every piece of a 20,000 pc apparel order unless you have a few people helping you. And even then it would take at least a week. The trick then is looking at enough of production so that you really come to an idea as to overall quality of the production. If you look at too little of production then you may miss bad production lots, bad cartons and come away from your inspections thinking your product is better than it actually is. If you try to inspect too much fatigue will set in and you may start to miss bad product or just start passing everything. I have experienced the fatigue factor before on inspections and it really can slow you down.

Probably the best method for doing an inspection in China is AQL, which stands for Acceptance Quality Level. AQL is based on statistical sampling methods first implemented during WW2 to monitor procurement of wartime supplies. At that time 100% sampling of military supplies was found to be ineffective, costly and time-consuming. So AQL was devised as a means of verifying if a production lot was acceptable or not based on looking at a fixed number of pcs.

This is a very simplified version of how AQL works.

There are 3 levels of an inspection, 1, 2 and 3, 1 being the most lax and 3 the most rigorous. You determine the level of inspection you want based on your customer. If you are doing plastic promo items for a chain restaurant, for example, you probably don’t need a strict inspection and a level 1 inspection might suffice. If you are doing high-end décor for a well known retailer with severe chargeback penalties, on the other hand, you need the strictest, Level 3 inspection to ensure that your product is in compliance. At the same time if you are working with a vendor whose quality leaves something to be desired, and who was sure to fail a Level 3 inspection, then a Level 2 inspection might be the best. So as you can see there are a lot of subjective variables involved in determining the framework for your inspection. For this reason you need to be flexible with the results.

Your PO QTY then determines your sampling lot. For example if I had an order of 20,000 pcs for level 2 customer, I would pull 315 pcs from the order and inspect those. If among those 315 pcs I found 14 or more broken pcs and more than 21 pcs showing other “minor” problems then the inspection would fail. The vendor would then have to open up all the cartons and inspect and repair the whole order. Needless to say, this is why vendors do not like inspections.

The key to doing an AQL is, as I said above, flexibility. You cannot always just take a pass/fail for what it is. For example, if you pulled 315 pcs from production and 14 were broken but the rest of the sampling lot looked very good, then you might just want to accept the order especially if you only needed only 80 % to fulfill an important order on your end. It also depends on your vendor. If a good vendor fails an AQL inspection there may still be plenty of good product in the order and you may just have made a mistake in picking your sampling lot. If a bad vendor fails an AQL inspection then you will probably find more bad product.

Once again, this is a simplified version of AQL. There is a lot more involved, for example how to pick your sampling lot and establishing your own acceptable quality levels. But if you are going to do an inspection in China it is a good idea to familiarize yourself with the AQL. It will save you a lot of time, sweat and aggravation.

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