Interview with the East Asia Company

A procurement software company asked me to sit down for an interview a couple of weeks ago. This is pretty much doing business in China in a nutshell. http://blog.procurify.com/2014/05/08/tips-on-doing-business-in-china-from-a-veteran/

Appreciating your vendors even when you don’t feel like it.

I have many small business owners or mompreneurs who come to me complaining about their China vendors. Most of the time quality is not the issue. It is cost. Costs gradually go up over time, and sometimes there is a big increase. The small business owner, with all the downward price pressures they face, feels helpless and approaches me to help them find a new vendor. Of course I am more than willing to help them but my advice very early in our conversations is always to stop for a minute, take a deep breath, and look more sympathetically at their current vendor. After all it is their current vendor who has helped them build their business to this point.

I have said this many times that just as there is no perfect spouse. there is no perfect vendor. If you have a vendor who has helped you build a business over the years, no matter what issues you have with that vendor, you have to see them as part of your family, so to speak, and appreciate them for that. That does not mean you can not look for a new vendor. You can and perhaps should. But don’t do, as so many who come to me are inclined to do, and look on those years you have spent with your current vendor as a waste of time.

If you do find a new vendor, make sure you spend time with that vendor before you leave your old vendor. Who knows the new vendor might be much worse than the old vendor. In fact, I just had a client say to me the other day, “ Geez, Vendor Y (her current vendor) is looking better all the time. “

The bottom line is growth. If your business is growing with your current vendor, is that so bad ? I don’t think so.

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The EAC junk email index of Chinese economic growth

As some measure of how slow China manufacturing is now, all I have to do is look at the number of unsolicited emails I get from vendors on a weekly basis. From the week of 7/9 -7/16. I received 20 unsolicited emails from vendors in China. These are emails from trading companies or factories advertising their products to me. In that same week I probably received about 20 emails from shipping or logistics companies. So figure about 40 unsolicited emails on average per week now.

If I go back to January of this year, picking a week at random, I see that from 1/14/13 to 1/21/13 I received just six unsolicited emails from vendors in China.

And if you go back further, to July last year, from 7/9/12 to 7/16/12 I received just two unsolicited emails from vendors in China – and both of those were vendors I had dealt with in the past.

The increase in the number of unsolicited emails I am receiving these days just makes a lot of sense when you consider the slump China manufacturing is mired in, all indicators way down from last year at this time. I find the emails from logistics companies alone fascinating because I read so many stories nowadays about the excess in container cargo space out of China. The big shipping companies are really struggling.

Still, I can’t say I mind all the emails because it just means that I have a much bigger pool of new vendors to consider. These are obviously vendors who want business. And that is very important in and of itself because you do not want to partner with a vendor who does not express enthusiasm for your business. Plenty of those unenthusiastic vendors out there as well, bad economy in China notwithstanding. Of course, I am sure there is a LOT of riff-raff among the companies who send me these emails but I am sure there are some diamonds in the rough as well.

I just wonder if we will ever get back to the “normal” few emails a week rate ? I kind of doubt it because China manufacturing is just different now.

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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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How to survive a Chinese banquet

What people are saying about Mulberry Fields
What you say is absolutely true about what you need to do to succeed in China.” – a company in Italy

Just some more today on my client in Toronto who will be making his first trip to China at the end of this month. He tells me that he is allergic to crab and was thinking about getting some cards made up with the message – in Chinese – that he cannot eat crab. I told him I thought this was being overly careful – not to mention that it would just accentuate his inability to speak Chinese earning him little respect from his hosts. It would after all be better to simply learn how to say “I don’t eat crab” in Mandarin than to hand someone a card on which this statement was printed. I told him he just needs to inform his hosts that he cannot eat crab and that should be enough to get him through the meal without breaking out in hives.

In fact if you travel to China and have any dietary restrictions you will have no problem as long as you tell your hosts beforehand and are somewhat vigilant during the meal. You need to be vigilant because just because you don’t eat fish does not mean it won’t be ordered. So it is always good to confirm with your hosts what you are eating all the more so because there will quite a few dishes on the table at a normal sized dinner or banquet. But relax because the Chinese are the consummate hosts and usually there is someone at the table who is watching out for you. You can think of this person as your “monitor.”

However, being allergic to something and not wishing to eat something because it does not sound or look palatable are two entirely different things. You should never decline any food that is served to you in China even if that includes some of the more unappetizing things that show up regularly at a Chinese banquet e.g. tongue, snake, chicken feet, mule, etc.etc I think this is sheer courtesy no matter where you are. Yet it is uncanny how many times I have been to China with foreign guests who shamelessly winced as they were offered something and then deferred much to the embarrassment of their Chinese hosts. Imagine if someone came to your house for dinner and you prepared an extravagant meal for them only to see them turn up their nose in disgust at one of your dishes. So the best advice is to stomach what you can’t eat ( no pun intended). At the very least it will make for a great story when you get home.

Drinking is another thing you cannot avoid unless you simply do not or can not drink. If you explain this to your hosts they will respect this. But be warned that there is no such thing as drinking in moderation at a Chinese banquet, especially for males. In other words you cannot tell yourself or your hosts that you will have just one beer and quit at that. If you don’t drink with them they will interpret that to mean you do not enjoy their company. In Chinese there is an expression for this. 一醉方休 不醉不归 ‘ yi zui fang xiu bu zui bu gui ‘ which simply means you don’t go home until you are drunk.

The expression is the rule.

http://www.theeastasiaco.com

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Don’t celebrate that first big order just yet.

What people are saying about Mulberry Fields
“I have read through quite a few of your blog posts and have enjoyed them very very much. We do business in China and face many of the challenges you describe. Much of what you write resonates with me and there are some very helpful tips” – a children’s apparel company in Utah

I came across a great article in Forbes recently about small companies getting on the map with orders from big retailers. I was very much interested in the article because I would say that about 50% of my clients over the past couple of years have been small companies that were fulfilling orders for global retailers. Most of them start out small selling on the retailer’s online site, but at some point as their products do well in online sales they are approached with an offer of store sales. And that is when the QTYs go up astronomically. Taking Home Depot as an example, well, HD has 1 website but they have about 2500 stores in the US. In other words, once your product is on the shelves at Home Depot, your exposure is going to go up very quickly. So you have to be ready, which was one of the main points of the article.

According to the article there are four things small businesses need to do when they get that first big order:

1.) Make the delivery date.
2.) Enlist the help of professionals to make sure the first order goes smoothly
3.) Be flexible to change your business model.
4.) Don’t assume that just because it is a big order, it is a good order for your company.

Let’s look at each point as it applies to fulfilling orders that are sourced in China.

1.) Hitting the delivery date. In order to do this give yourself and your vendor plenty of time. Do not consent to unrealistic lead-times dictated by your buyer. It is probably better not to take the order than to take it and deliver it late and subject to cancellation. As the Forbes article makes clear, if you mess up on your first order you may very well not get a second chance. The thing to keep in mind here at all times is that your China order is more likely going to ship late, than early or on-time. That is the nature of off-shore manufacturing. Anticipate delays and build them into your discussions with your buyer. If buyers want your product badly enough they will be flexible on the delivery dates. I would also venture to say that it is more important your supplier is comfortable with your delivery date than your buyer.

2.) Do not try to handle China by yourself for your first big order. It is too difficult. Hire a consultant to help you with vendor management and also make sure you are working with a logistics company or freight forwarder to handle customs and delivery. Make sure you cover all the bases and have smart people in place to handle all phases of the operation.

3.) Look at options for your product that will keep costs down and make it more likely that the order will go well. I have one client who has looked into getting his packaging done in the US because it does not cost significantly more than doing it in China. Needless to say, he will be in more control of his production if he does his packaging domestically. Smart move. But the main thing is that he is thinking of options.

4.) Just because you get a big order don’t assume you have it made. Big retailers will beat you down on price and in the end it may not even be worth all the trouble and cost to take the order. Big orders sometimes turn into complete fiascos. So be philosophical above all else. In short, don’t take the risk unless you have sat down looked at the order from all angles and you are sure it is worth it.

Here is the link to the article. Enjoy
http://www.forbes.com/sites/sap/2012/11/07/the-walmart-effect-4-best-practices-for-dealing-with-that-first-huge-order/

http://www.theeastasiaco.com

How to find suppliers in China

If there was a foolproof method to finding good suppliers then I would not be writing this post right now. I probably would not even have a China -related job but would be off teaching 18th Century literature somewhere. The fact is that finding reliable suppliers is one of the most frustrating aspects of sourcing in China.

There are four ways to find suppliers in China:

1.) Online sites like alibaba.com and global sources. I am skeptical of meeting vendors online simply because you have no idea who you are dealing with. I sometimes find it useful to get quotes from online suppliers when I am trying to figure out how much something costs to make in China but as far as actually ordering from people I have not met and know next to nothing about I would not advise it. I certainly would not do it if it were my business. A lot of small companies, start-ups and mompreneurs source online because the costs are seductively low, it is an easy process and they do not understand what a minefield China sourcing is.

2.) Trade Fairs. This I think it the best way to find new suppliers. As I have lived in or travelled to China for 25 years and speak the language fairly well I have become pretty adept at evaluating vendors, and I would say that my snap judgments are fairly accurate. I can usually tell what a vendor will be like to work with after spending an hour in their trade show booth discussing things with them and then following up with them after the show about samples and other issues. Occasionally I am surprised when a vendor I had marked as a good prospect turns out to be otherwise. But like I said I generally can spot the good ones from the bad ones. I really believe that there is no substitute for meeting the people who are going to be making your product. It is expensive to attend trade fairs in China. But it is more expensive to take possession of 3 containers of shoddy goods you cannot pass onto your customer(s).

3.) US or Canadian based China agents or product development companies. Although agents can save you a lot of time, energy and money in the beginning, working with agents over the long-term can be a costly exercise in frustration. In fact, most of the inquiries I get are from people who are not satisfied with their US or Canadian based China agents. They are not satisfied with the quality of the product they are receiving or the rising costs of that product. Still this is not to say that there are no good agents out there. There are and I have worked with them. But my sense is that you have to go through a lot of bad agents to find a good agent.

4.) Referrals. If you have a friend or trusted acquaintance who can introduce a good vendor to you this can remove a lot anxiety and some risk when you source in China. There are two problems with this approach though: First, how many people do you know who are doing business in China in your same product line who are not competitors and would be happy to divulge their suppliers to you ? Second just because a vendor has proven reliable for someone you know does not mean they will be so for you. It all depends on your product, QA standards, target costs and QTYs. There is no vendor who is simply going to roll out the red carpet for you just because one of your friends is a customer of theirs (unless they are a HUGE customer). But getting the name of a factory from someone you know, if you can do it, is a very good start. You should at least receive prompt replies to all your production inquiries.

The key is as I wrote in my post yesterday, to manage expectations. It may take you a year or two to find a supplier you are happy with. If you know that going into your China sourcing, your experience in China will be better.

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The raw materials market in Shenzhen

When I was in Shenzhen last month I took a day trip out to an area outside of Shenzhen were most China factories buy their raw materials.  When, for example, a factory in Shantou makes coffee mugs for a US importer this is where they come to get their raw materials. The place is huge and you can see anything and everything there – in its raw material state. There are separate areas, for textiles, glass, metals, plastics etc etc.  I was here with a vendor looking for PP for a project I am working on now. It was very interesting to see that a lot raw plastics (polymers)  are coming into China from places like, Thailand, Korea, Vietnam and even Taiwan. Chances are that if you have a resin product in your line it is made with a fluff (polymer) and additive from one of these places although the product label will say “Made in China.”  When I asked the vendor about this he replied to me that there is a stronger environmental movement nowadays in China so vendors must source these materials abroad. I think this is part of the reason as Chinese local govts particularly in South China are becoming ever mindful of industrial waste. But I am sure there are other reasons as well, mainly having to do with cost. The vendor went on to say that China’s advantage is its abundant labor pool, factory capacity and state of the art machinery.  But the actual raw materials are often cheaper in developed countries.

Anyway, the next time I hear from a supplier about the rising costs of raw materials in China, I will believe them. It was a fascinating visit to a fascinating place.

The spring 2012 Canton Fair

I just returned from the Canton Fair.  Everyone seemed to think business was really down from a year ago.  And with the exception of the second day of the fair which was extremely busy, my impression as well was that things at the show were very slow.  You could walk down some of the aisles at the rear of the halls – where most of the small vendors are located –  and the gloom was palpable. The stories in the news these days about slow growth in China seem to be true ( though the slow growth is mainly in the domestic market).

One thing I am frequently asked is why I attend the Canton Fair and not the Hong Kong sourcing fair which is held at the same time. The answer is size and cost. The Canton Fair is far larger in scale than the Hong Kong fair and, needless to say, there is a greater likelihood of finding what you are looking for if there are more vendors, even though you have to weed through many undesirable vendors. At the same time you have to take into account that there are bad vendors in at the Hong Kong show as well. I have worked with some.

The second reason I prefer the Canton Fair to the Hong Kong fair is cost. I talked to one Australian lady I have run into several times at the Canton Fair and asked her about Canton vis-à-vis Hong Kong since she regularly attends both fairs. She replied that she often sees the same items in Hong Kong that she sees in Canton but at a much higher cost. She elaborated that the Canton Fair is definitely “down and dirty” compared with Hong Kong but that there are good vendors to be met. For her business – gifts – she needs to source at Canton to keep her margins. She goes to Hong Kong for design.

In fact, I asked several overseas buyers I know who attend both the Canton and the Hong Kong fairs to share their thoughts with me. The consensus was that Hong Kong has more design driven and innovative product than Canton and that it is a more professional fair ( all vendors have catalogs whereas at Canton many do not ) but unless you are selling direct to the end consumer it is hard to absorb the cost markups. For wholesalers the Canton Fair is essential.  When I asked if they could only go to one fair which it would be, everyone unhesitatingly replied Canton.

One interesting aside on this blog post:  The Australian lady mentioned above told me that more and more Australian companies are attending the Canton fair so her market back home is becoming increasingly competitive.  Austrailia after all is a relatively small market. She sees the need going forward to start attending other fairs in Asia in order to stay one step ahead of her competition.

The new buyer-supplier relationship in China

Since China opened its doors to the West in 1978, overseas buyers have come to demand and expect perfection from their Chinese suppliers, even for low value-handicraft product.  Up until very recently this mindset was tolerated by Chinese vendors because over the years orders from overseas accounted for most, if not all, of their sales revenue.  There was very little demand coming from within China itself and Chinese suppliers had no choice but to defer to their overseas customers.  But this is  no longer the case as domestic demand – not orders from abroad – is driving a myriad of Chinese industries nowadays.  A case in point : during my visit to the Canton Fair last month I saw more mainland buyers than I had ever seen at the fair previously and I overheard conversations in Mandarin in which vendors were negotiating with domestic, not overseas, customers.

In fact, if given the choice Chinese vendors would probably prefer to manufacture for the domestic market for several reasons:

1.)  Chinese customers present very few, if any, language or cultural barriers. When communicating with overseas customers, on the other hand,  China vendors must pay for skilled staff who can speak English, and they must entertain overseas customers, often at their own expense.

2.) There are significant incidental costs when dealing with overseas customers.  For example vendors may be asked to pay hefty air freight charges for late or incorrect samples and/or production.  Orders are also subject to lengthy delays because of design requirements, and there are frequent lags in international communication and logistics. I don’t know if I have ever been in a Chinese factory where a worker or management has not complained about an overseas customer’s product specifications or lead-time requirements.

3.) The market in China for consumer goods is not sophisticated vis-a-vis markets in the west.  There are no extensive product testing protocols in China that rival CPSIA in the US or EN-71 in Europe. One vendor recently told me that most of the PU his factory used had not been tested for Phthalates and that if my customer wanted Phthalates free PU they would have to order a special grade at a much higher cost.  In other words, Phthalates is not something Chinese factories have to worry about when they manufacture for their own markets.

The result is that many Chinese vendors now seem to have a take it or leave it attitude with overseas customers. I have been surprised how many companies I have contacted this year have not sought to follow-up on samples sent to me or who have expressed little or no interest in doing business with certain of my customers. They have failed to do so either because the MOQs I have provided them with are not large when compared to those of other overseas buyers, or there is plenty of domestic demand with equal, if not larger, QTYs. 

Overseas buyers need to exercise some sensitivity about these changes in China manufacturing, all the more so if they do not have large order QTYs. Sampling demands should be kept to a minimum and product design should be well thought out on the buyer end so that little is left to the vendor to solve on his/her own. Vendors do not want to spend valuable time re-designing your products.   Buyers should not rush vendors or work under the assumption that their order is the most important order the vendor has on their production schedule.  Most often it is not.  The point is this:  China vendors still want your orders.  But  they are no longer  desperate for them.