When a sample order takes too long it is time to worry

A client of mine told me today that it took him a few months to get samples from a new vendor in China. The only reasons I can think of are that either the vendor was super busy and not interested in doing a sample order for someone who is not yet a customer; or the vendor was subcontracting the sample order.  In either case it is not a good sign that samples would have taken so long. Most samples take a couple weeks.  A long sample order would be a month.  3 months for a sample screams unorganized.

When I negotiated with this vendor a few months ago, I found them very responsive.  And my client said that the quality of the samples he has received has been good. The only problem is the sample lead time.  In a situation like this I think you have to proceed carefully.  If my client has it in his budget, he should have someone go inspect the factory and talk to the manger to find out why the samples have taken so long. A visit to the factory would probably answer a lot of questions.   If my client does not have a factory audit in his budget then I think I would be very reluctant to give this vendor an order, the good quality of the samples notwithstanding.

I tend to look at sample orders as not only for testing the quality of a product but also for testing a vendor’s responsiveness and reliability.  And I like to tell people that if they have a lot of trouble with a sample order, then imagine how difficult it will be when they have a production order shipping against a cancellation date.  That is when China sourcing threatens your business.

A last thought:  I have been in this situation before.  You have a vendor that delivers you good quality samples within your target cost.  Or you meet a vendor at a trade show with a great product. But they are unreliable in other ways e.g. not showing a particularly friendly or cooperative attitude when solving problems, not doing things when they have promised.   As reluctant as you are you really need to move on.  Because as I said above if the relationship has problems early on, those problems will only get worse later.

What should you budget for a first-time order from China ?

A woman emailed me recently asking me if I could help her with sourcing.  She has just started a company selling fashion accessories. In our email correspondence I sensed that she may not have given the business the thought that she needed to, in terms of how much it costs to get up and going with a China order, for there are hidden costs that people often ignore focusing only on the seductively low first costs that they see on alibaba or other popular sourcing websites.   Accordingly, here is what I think it would cost to get a first order from China.

Sample development.  You have to assume you will go through a couple of rounds of samples with a few vendors before deciding on a final vendor.  There will be sample charges and express courier fees ( you cannot send samples via regular air mail because they often get lost) .  Assuming you have a product that does not require a special mold, you are probably looking at $ 200-300.00 per vendor for sample charges and courier fees.  So figure $1000.00 just to get some good samples from a few prospective vendors.  If you have molds figure a few thousand dollars just to get samples from one vendor.

Testing:  If you sell any PCG (Packaged Consumer Goods) then you will most probably need some kind of testing for your product as per CPSIA ( Consumer Protection Safety Insurance Act).  Figure $500.00- 1000.00 for product testing.

Consultant:  If you are sourcing a product overseas it behooves you to retain a consultant or sourcing agent to help you get started.  Sourcing agents or consultants charge anywhere from $300.00 to 5K for a sourcing project.  So figure $500.00-1000.00 for a reasonably priced consultant/agent.

First Purchase Order:  Depending on the unit cost and MOQ ( Minimum Order Requirement) figure $3000-5000.00 for a first order.  Of course I am just throwing this number out there but a good rule of thumb is that China vendors are not really interested in orders under 5K.

Inspection:  To have an order inspected in China costs about $300.00 per day, not including expenses. But inspection is the only way you can make sure you are getting the quality you have paid for. Figure $1000.00 to have an order inspected.

Shipping:  Vendors quote you FOB which means they only deliver the goods to the port It is up to you to arrange shipping. You will need to use a shipping agent because the documentation is far too complicated to do on your own.  Figure $1000.00 to ship a small order from China going LCL.

When you add all this up you are looking at an initial investment, on the conservative side, of close to 10 K, just to get a first order out of China.  If you have a design oriented product for which the vendor will have to create special molds then figure 15-20K for that first order. And this does not include what it costs you to set up your website, establish your company, obtain product insurance and copyright your designs. That right there may cost you and additional 10 K.

 

 

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

 

 

 

 

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

 

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 !

 

 

 

Is there any way around MOQs ? Unfortunately not.

One issue that small companies and start ups grapple with all the time when they source overseas is MOQ (Minimum Order Quantity).  I don’t think a week goes by when I don’t get an inquiry from a small company that wants to source a product in China but in very small QTYs, in many cases just a few hundred units. For example, a few weeks back a London based women’s apparel start-up emailed me.  They have 20 designs and want to order between 100-200 pcs per design.  They want good quality and a low cost.  I told them that I saw this as a very challenging project and I suggested that the only way to do this would be to reduce the number of designs and increase the order QTY per design. Only in that way could they think of meeting the fabric MOQs that vendors in China would likely be facing were they to take this order.  Like many small companies that hold steadfast to their designs, this company said they didn’t want to eliminate any designs and that was the last I heard from them.  I imagine they are back on alibaba looking for suppliers.

Although there are suppliers in China that will accept small orders, these are generally not reputable suppliers and if you do place an order with a vendor like this you might just be throwing away your money. The vendor makes a small profit and sends you an order you cannot sell.  I have seen it happen many times.

Just out of curiosity I went online to see how other sourcing consultants handle the issue of MOQ. In other words is there any way around MOQ ?   Some of the advice I saw is as follows:  limit product customization; negotiate a lower MOQ; pay a higher unit cost; streamline material usage; focus on buying from small suppliers etc etc. Let’s look at these strategies:

• Simplifying product design. Conceivably, the only way this would get you around an MOQ would be if you were simplifying design to cut unit cost so you could order more of a product to meet an MOQ.  It sounds good in theory but I have never in fact seen a company do this.  Companies that change a design do so to lower costs, not to increase their costs.  I would add that modifications to a product design, unless major, usually result in very insignificant cost reductions.  But, as I said, I have never heard of a company doing this.
• Negotiate a lower MOQ. I think this only works with vendors with whom you have had a longstanding relationship. They want to maintain the relationship and therefore will sometimes waive MOQ requirements.  This happens all the time. On the other hand, if you negotiate a lower MOQ with with a first time vendor, they will just seek to cut costs in your production and you may end up with goods you can’t sell.  I always advise companies not to get into protracted negotiations with first time suppliers because it just sends the relationship in the wrong direction from the get-go.  But OK if you are trying to get around an MOQ with a longstanding vendor.  It never hurts to ask.
• Pay a higher unit cost. What you will have to do if you want to order less than the MOQ. If you have target costs this may make your project untenable. It also locks you into a higher price as your orders get bigger. Yet this is what many companies have to do to get around MOQ.
• Streamline material usage: Not realistic unless you have a product you can do this with. Most small companies don’t.
• Buy from small suppliers. Small suppliers are usually not reputable suppliers.  If you have any kind of strict design requirements, you will not have success with small suppliers who simply do not have the expertise to handle challenging designs/orders.

In fact, the only thing I advise small companies to do when they are inquiring with a China vendor about MOQ is NOT to ask the vendor first what their MOQ is but instead to give the vendor 3 QTYs to quote on, one for the minimum they think they can order and then in increments accordingly. For example if I wanted to make a wooden picture frame in China I might reach out to vendors and tell them that I am interested in QTYs of 1000/2500/5000 and ask them to quote on each QTY accordingly.  If the vendor really wants my business, they will quote me on my terms and will not mention their own MOQ, even though they may in fact have one.  I think this is really the only way to get around MOQ. But even this strategy has its limits because many vendors will just come back to you and tell you that they have an MOQ.

In short, this is why overseas sourcing is so challenging, because no matter how cheap the unit price is, you are not going to get that unit price unless you order a far bigger QTY of product than you might be able to sell.

 

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.

Is manufacturing really coming back to the US ?

I love reading the Wall St. Journal. In addition to great book reviews and the always interesting human interest stories at the bottom of page 1, there is a lot of China news, usually in the Marketplace section. This past week there was an article entitled “It’s No Fun Making Toys or Toasters in the USA.” As the headline suggests the article was about the challenge that small business in the US face when they try to manufacture here in the US. In fact if you are a toy company and want to get, say, a plastic toy made in the US, it is almost impossible to do so. The main reason is that US manufacturers are just not set up nowadays to handle large orders, most of those orders having gone to China over the past 20-30 years. So China now has the infrastructure and the US does not. This is nothing new, really, and I have written about this before here. Making dolls in the US But I like to see these stories now and then in the major news outlets because I think they offer a good dose of reality and offset the almost fantasy like stories about manufacturing returning to the US. Because you know, with very few exceptions you just can’t make low cost consumer goods in the US anymore and have a viable business. A case in point: I received an email from a vendor in China the other day and this vendor was offering a 3 pc breakfast set , a table and two chairs, made out of particle board and powder coated steel. The price $ 28.00. And I am sure if I went back to him and told him I wanted to place an order for 1000 pcs I could get it for under $20.00. And there are probably 1000 more vendors like him in China. Do you think there is any place in the US where you can buy a breakfast table and two chairs for $ 28.00 ? I seriously doubt it.

 

The importance of counter samples

I visited a company the other day and was surprised to learn that this company does not as a rule keep counter samples when they do production in China. The handmade nature of the product and the small order QTYs leads them to believe that counter samples are really not necessary as they pretty much inspect every piece upon delivery. Although I have never heard of an importer, particularly for a design driven product, that did not keep counter samples on hand, I can’t argue with them since they seem to be doing a pretty good business. Theirs is a design driven product with big margins. I simply suggested to them that counter samples is a very good idea. Maybe when their business grows they will see a necessity to do this. And most certainly if they get a large order from a big-box retailer they will need to do this.

As a rule I think it is a very good practice to keep counter samples on hand and to make sure your vendors have them as well. A case in point: a past client of mine emailed me recently and asked me if I could request samples of one of his products from a vendor we had discussed an order with a couple of years ago. It seems my customer had no more samples of his own product. When I emailed the vendor to see if they could do some more samples, they very politely declined. They explained that it was a lot of work for them to do samples and they did not wish to make any more samples without an order. And I do not fault them since it has been two years since we first approached them and my client has not given them an order in that time. Reading between the lines, I would just say they are busy and do not want to be bothered. But that is their right. Still in the end my customer does not have a sample of his own product. Hard to believe, isn’t it. He will have to dig out the artwork for the product and approach a new vendor to get new samples. This will cost time and money. And it just goes to show the importance of keeping a counter sample on hand at all times.

In the end it always comes back to China

Someone ran a project by me last week. The person wants to source camping chairs. But the catch is they don’t want them from China because of China’s problems with child labour. Hmmm, I thought to myself that could be tough seeing as product in some consumer goods categories e.g. toys, outdoor equipment are almost exclusively made in China. In fact I recently saw one stat from a prominent toy industry blogger who said that about 85% of the world’s toys are made in China. That is a bit higher than I thought but it still does not surprise me. That’s China.

Anyway, as I usually do I went on alibaba to do some research. Let me make it clear here that I do not think alibaba is a good place to source vendors. But it is a great place to do research and that is how I like to use it. So and did a search of camping chairs and . worldwide 1,248 suppliers came up. Then I did an advanced search restricting my search to China and 1130 suppliers came up. That means that just 118 suppliers worldwide, as listed on alibaba, are not Chinese. I then restricted the search to India and just 16 suppliers came up. But half of those list camping chairs made in China. Moral of the story: it could be very hard to find a non-Chinese supplier of cast iron or aluminum folding camping chairs,

Of course there are countries other than China where camping chairs are made, the aforementioned India, Turkey et al. Of those 16 India vendors, for example, half of them do produce locally I saw. But then you have to ask yourself how those vendors are set up to compete with China on price and quality ? I suspect the chairs are either very pricey, compared to China, or the quality is very bad. In other words, you really don’t have any choice but China for some of these product categories if you have margins to meet and/or big QTYs.

And it will still be this way for many years to come.