FOB vs CIF

I had an inquiry today from someone who wants to move their CPG ( Consumer Packaged Good) production from the US to China.  They want to ship CIF which stands for Cost Insurance and Freight.  In a CIF transaction the supplier/exporter is responsible for assigning a carrier/vessel and insuring the cargo.  Once the vessel lands at the destination port the buyer/importer takes possession.  The main advantage to doing a China order CIF, as opposed to FOB ( Free on Board) is that the supplier handles all the shipping arrangements for you.  You simply have to pick up the cargo when it arrives and arrange for transportation to your warehouse. In theory CIF reduces the work load on the importer and may seem like the ideal arrangement for a first time importer who has no experience with international shipping, which can be quite complicated.  The downside to CIF however is considerable.  Your product will cost more because you are asking your supplier to bear more responsibility and not surprisingly most suppliers will look at a CIF proposal as an opportunity to pad their margins. In addition, you lose transparency on the real cost of your product.  The real cost of your product is what it costs to make and package your product.  Not what it costs to ship your product ( which is landed cost and which varies depending on a number of factors). You will also have no control over shipping.  If yours is not a time-sensitive order then CIF might be OK.  But if you need your product shipped on a timely basis, to fulfill orders, you will be taking a big risk because you will have no control over transit times and carriers.  In fact, your supplier may not choose the best carrier but the carrier who offers them the most preferential terms.  Your supplier will act in their best interests, not yours.

With an FOB order, on the other hand, the importer, working with a Logistics company, has complete control over shipping.  If problems arise you can work quickly with the carrier directly to resolve them.  The downside to FOB is that, yes, you need a Shipping or Logistics Company to help you arrange shipping. This is of course another cost, one of the hidden costs to overseas sourcing.  But you have to look at it as one of the necessary costs and you should be prepared to bear it.

In the end your expenditure will probably be the same, whether you allow your supplier to arrange shipping, resulting in a higher unit cost for your product, or whether you enlist the help of a Logistics company to help you arrange shipping and handle documentation.   It is when problems arise that you are far better off with your own shipping agent as opposed to trying to resolve problems with an anonymous shipping company that has been selected by your supplier.

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Worried about making that first trip to China ? Relax !

I was thinking today about the conversation I had the other day with the NYC lady who, at the end of this month, is headed off to China for the first time.  She certainly sounded nervous, knowing no Chinese as she does and feeling very panicky at the mere thought of getting lost over there, even though she will be staying in a reputable hotel and has already arranged her SIM card on arrival in China. I re-assured her as best I could.  Guangzhou, after all, is a very modern city and boasts a very modern, user-friendly subway that would be the envy of most cities around the world.  In addition Chinese people are very hospitable and one really does not have to worry about getting lost in a big Chinese city.  There are always people who will help you and signs in English are everywhere. Let me put it this way: you are safer knowing no Chinese and getting lost in a major Chinese city than you are getting lost on your own turf, that is in a major American city.  So she really has nothing to worry about, other than perhaps getting ripped off by an unscrupulous taxi driver.  Even that though can be avoided by taking taxis stationed at the hotel where she is staying and having the hotel doorman quote the cab driver on the fare.

But I thought back to my first trip to China.  Now that was scary. It was 1988, just ten years into Deng’s reforms.  I flew over on a Canadian Airlines flight from SFO to Beijing.  I remember the flight because NBC correspondent Keith Miller was on the same flight, flying coach, as well as the Canadian Olympic Basketball team.  The plane landed in Beijing on a warm July evening.  There was an enormous crowd of people at the gate coming out of Customs and not all of them were smiling.  There were very few foreigners in China then and anti-American, anti-Western sentiment was palpable.  To say I felt uncomfortable would be an understatement. My Chinese teacher in NYC had arranged for me to stay with her husband at their apt in Beijing but I had no idea what he looked like and all I had was a name and address. In those days most people in China did not have private telephones but used a communal phone so if for some reason we did not hook up I had no idea what I would do. Fortunately, after several minutes scanning the faces in the crowd (they were as curious to me as I was to them)  I spotted my name on a piece of cardboard in a sea of arms and I knew that must be my contact.  Needless to say I was very relieved.

Over the next few days going around Beijing I saw perhaps one or two foreigners, and that is all. Although a lot of people smiled at me, not everyone did, and on one occasion we were refused service in a restaurant because I was American.  My host was embarrassed by this but in those days that was par for the course in China.  It was not an easy place to be and I was very careful not to get lost. Nowadays when I go to China, I feel like I am home.  Imagine that !

But I kind of chuckle when people come to me nowadays and tell me they are nervous because they are going to China for the first time.  Believe, me, you have nothing to worry about !

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The first thing a prospective vendor will look at: Order QTYs.

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.

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Five useful things to include in your China sales contract

There are the obvious things you want to include in your sales contract with your China supplier including negotiated cost of item, delivery date, procedures to return defective items, right of cancellation, terms of cancellation, non-compete clauses etc. etc. However there are five things you can include in your OEM Agreement or contract which may prove helpful in getting an order out of China that you are pleased with.

1.)
Product specs as appendices. Don’t just include a brief description of your item but attaché your production spec sheets as an appendix . You should also attaché your QC checklist as an appendix. In short, all the information and design that you have given your vendor during product development should be attached in some way, shape or form to the sales contract.

2.)
Right to inspect goods at any time. I have seen many vendors who want you to come for an inspection when it is convenient for them and not for you. You should make it clear to your vendor that you have the right to inspect your order at any time and you plan to do so even if you don’t intend to conduct the inspection yourself. What this clause may do is to serve to keep the vendor on their toes as far as production dates go. The last thing you want to do with a vendor is give them an order and leave them with the feeling that all they have to do is make the order and ship. So address a potential inspection in your SC.

3.)
Right to request a stoppage of production if an inspection reveals widespread defects. You should have the right to tell the vendor to stop production if you feel your product is not being made according to spec. Once again the purpose is to send a message to the vendor that you take the order seriously and are not just going to give them a PO and sit back and wait for the ship date.

4.)
Return of buyers IP in the event of breach of contract. In the event that you cancel the order, you should ask that your vendor return your IP. I had a situation a couple of years ago where a customer of mine had given some designs to a factory they thought they were going to go ahead with. They subsequently canceled the order because of widespread non-compliance and then they had to argue with the vendor getting their designs back because they did not have anything in their OEM contract about this. The ended up just marching into the vendor’s office and removing the designs as their vendor stood there browbeating them . The moral of the story is don’t give your vendor new designs unless you are 100% sure you are going ahead with the vendor on a second or third order.

5.)
Agreed on raw materials clause – If your products have certain requirements e.g. toy or food items you should specifty these in the product specs but also specify them in a raw materials clause. For example, if you want your vendor to use only environmentally friendly fabric, you would want them to spell it out here. And add that all samples pulled from early production will be subject to required testing.

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The value of a college education in China

What people are saying about Mulberry Fields
“A very interesting blog.” – a company in France

There have been a couple of articles in the Chinese newspapers this past week about the steady competition that recent college graduates in China face nowadays when they look for employment. Their situation seems to mirror that of graduates from US colleges and universities for whom the search for the right job, or sometimes just any kind of job, can be a long, tedious and angst-ridden process. I was interested to read about the job picture in China for recent grads because I used to teach at Jiaotong University in Shanghai, one of China’s most prestigious universities. When I taught there at the Management School in the 1990s a university education – whether at Jiaotong University or any of the other 50 or so colleges and universities in Shanghai – was regarded as a privilege and the last thing students had to worry about upon graduation was finding a job. For most the only concern was if they would be placed in a state-owned enterprise as opposed to a private company where salaries and working conditions were much better. But everyone got a job and quickly. It was very nice to see that, at least in China, where for centuries sitting for the Imperial Examination was the apogee of individual achievement, a college education was still considered valuable. And that is how I thought at the time. Sadly that no longer seems to be the case.

When you do business in China nowadays you may notice a restless quality among China’s young generation precisely because concepts like lifetime employment based on a college education no longer apply. The “Iron Rice Bowl” is broken. Young account managers and factory staff are always on the move looking for better and more lucrative opportunities. They are often not wedded to their present job. Be prepared for this accordingly and make sure your message is delivered loud and clear to a wide audience.

Here is another blog post about China’s restless generation.

job hopping in China

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China’s internal consumer demand spells competition for overseas companies sourcing in China

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

I was reading a report on China’s textile industry recently. The astounding thing is that demand from inside China for home textiles is growing while demand from outside China is decreasing. In the first 6 mos of 2012, for example, domestic demand for home textiles grew over 20% over the previous year whereas demand from outside China in the same period grew just over 1 %. The same trend can be seen in other industries as well. For example, domestic demand was a driver last year in China’s seasonal decorations industry as orders for Christmas goods from abroad slumped. Over 30 % of orders for seasonal goods in some manufacturing belts came from within China. Christmas after all is big in China too, believe it or not.

This really underlies what I have been seeing over the past couple of years, namely that China vendors are no longer desperate for orders from the countries that have traditionally driven China’s export industry over the last 30 years, for the simple reason that there is growing demand from within China. I would add that China’s export markets showing the most growth recently are from emerging market countries ASEAN Nations, Russia, Africa et al. These were the countries driving home textile exports from China in 2012. And this is why on some projects when I send out inquires some vendors do not even bother to return my emails if they have decided they do not want the business based on my target costs or QTYs. Many vendors nowadays have a simple take it or leave it attitude. I think this is the most challenging thing about doing business in China nowadays.

If you are sourcing in China you really need to be aware of this. You need to be organized, polite and most importantly flexible on price and on quality as well. As I am in the habit of saying recently, over the next decade sourcing in China may be as much a case of you soliciting their business as they soliciting your business.

Here are some other blog posts on how China is changing and the implications for you:

Work on that attitude when you do business in China
Quality not cost
The End of Cheap China; Book Review
Buyers and suppliers nowadays

http://www.theeastasiaco.com

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Is it better to go with a big vendor or small vendor in China ?

What people are saying about Mulberry Fields
“….very impressed with your blogs and knowledge.” – former Director of Product Development at Williams Sonoma

This is a follow-up post on a blog I wrote a few weeks ago about a client of mine who is thinking about giving an order to a good size company which is part of a conglomerate. Selecting a vendor

I remember about eight years ago I was working for a company in the US and I was in China with a couple of my colleagues to visit some suppliers. On our agenda was a courtesy visit to a big vendor outside of Shanghai, a vendor that supplied some of the biggest home décor retailers in Europe. Our orders must have seemed small in comparison and I am not sure how important they regarded us. However, the first clue was when they I called to arrange a time to come visit and the vendor did not offer any transportation to their office (highly unusual in China). When we arrived at the office we were asked to wait for 90 minutes. When our Account Manager came out, after exchanging pleasantries he asked us “what can I do for you?” And the attitude displayed during that visit was pretty much emblematic of their attitude when we did business with them. When there were problems it was hard to get them solved. And the only reason we continued in the relationship with this supplier was that they were European managed and had very high quality standards. But we were obviously too small to count for much with them.

More recently I met a bag vendor at the Canton Fair. This is a big company and they do bags for a lot of well-known companies. They were friendly and the costs they gave me at the fair were extremely good. So I thought I would give them a try. Accordingly after the fair I began the process of developing samples with them. Whereas other vendors took a few weeks or so to get me samples this vendor took over two months, and only because of constant follow-up emails from me. The sample, however, was good and my client wanted to proceed with them. I told her that I couldn’t recommend this vendor anymore because of all the delays but I would at least follow-up with them as she had asked me to do. I sent them an email accordingly and when I did not hear back from them in a couple of weeks, I told my customer that she really was barking up the wrong tree with this vendor. She simply did not have the order QTYs that interested them. She agreed and we dropped them from the list. Two months later, the vendor replied to my email. Our decision had obviously been the correct one.

Although it would not be accurate to say that all big vendors give you this lackluster treatment, it really is the typical treatment you will get with big suppliers in China – unless you are an important customer for them and have very good order QTYs.

Another thing to consider is that if you have a design driven product and you are used to working closely with your vendor you are much better off working with a smaller vendor even if costs are higher. You will not be able to expect the same input on your design from a large supplier. They are just too busy.

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Critical defects vs acceptable defects. Giving vendors a break is good for buyers too.

What people are saying about Mulberry Fields
“I have already learned a great deal about China and your business through your website and blog posts. Very impressive. ” – A Company in Toronto.

A client of mine is about to give an order to a vendor in China. I have advised him to give the vendor a QC checklist as well as adding all QC points in an appendix to the Sales Contract. QC points should also go on all product spec sheets submitted to the vendor. The idea is that whenever that vendor is looking at your order, your QC points are going to be reinforced.

At the same time you should establish in your own mind what are “critical” QC defects and what are acceptable QC defects. Critical defects are things that would make the product unsellable or returnable by your customer. For example on a wooden picture frame a “critical” defect would be a broken clasp, a cracked frame or glass. An acceptable defect might be a shade of color lighter than specified, a streak in the velvet fabric on the picture frame backing, etc. These are things a customer might notice but would not likely result in a return or lost sale.

In your discussions with your vendor on the QC checklist you should make sure you tell your vendor which defects are going to be considered “critical.” And give these points special emphasis. This is not to say you should not make equal mention of acceptable defects. You should but the tone of your directive should be “please try to avoid these problems” instead of “we will not accept product with these problems.” The idea here is to cut your vendor some slack so that they can feel confident in making your order and to avoid confrontations about quality unless it is your perception that the issue clearly jeopardizes sales of your product.

As I always say “Work with your vendor. Not against them.”

Here are some related posts that will help you work with your vendors, and not against them.

Setting tolerances for production
Being on the same page with your vendor
Inspections are good for your vendor
Give your vendors specs ASAP

China’s rising labor costs and how this affects you.

What people are saying about Mulberry Fields
” I REALLY do enjoy your posts and find them informative and helpful.” – a Wal-Mart supplier

I had an email from a client this morning asking me about China’s rising labor costs. He simply wanted to know what I thought. I told him that I covered this in my Feb newsletter. So I am posting that here today.

One of China’s biggest challenges these days is how to spur more domestic demand for its goods and services. This is necessary as orders from overseas slowed dramatically following the Global Economic Crisis and have not yet recovered. It is also a long term goal of the Chinese Central Govt to build an economy that is driven more by domestic demand – a market driven economy – than by overseas demand – an export driven economy. To this end the Central Govt. has encouraged provincial governments to raise wages so that Chinese consumers will be able to afford more Chinese products. At the same time local governments have seen that rising wages will attract more migrant labor and this will keep their local economies healthy. For the above reasons minimum wages in China are rising at steady levels. From 2010 to 2015 minimum wages across China are expected to show an 84 % increase. This is why you often see headlines nowadays about overseas companies moving to other countries in Asia or even back to the US or Canada. Even some Chinese companies are beginning to outsource orders to offset rising costs.

In most cases suppliers try to offset rising wages with energy saving measures in their facilities but inevitably some of those higher costs are passed on to the customer. Those cost increases may or may not be substantial depending on where your vendor is located. Vendors in the well known coastal areas, Shenzhen, Xiamen, Shanghai etc. have to offer much more compensation to keep workers in place than vendors in, say, Henan or Anhui Provinces. Another thing to keep in mind that rising wages really have the biggest effect on low end/high volume manufacturing where the unit cost is low. A $ 0.25 cost increase per unit that your vendor passes on to you so that he can hire and retain skilled workers may make your project untenable if your target landed cost is just $ 2.00 to begin with. In short, rising wages in China and how this will impact your business there really depends on what product you are developing in China and, again, where you are developing it. Finally you have to remember that even with rising wages across the board in China the “China cost” in some areas of China is still well below what it would cost you to make your product in the US or other developing countries. In other words, don’t pay too much attention to the headlines about rising costs in China.

The real lesson here is to familiarize yourself with the province(s) where your products are going to be made. Do keyword searches for all your China provinces with terms like “rising wages, “migrant labor,” “labor practices,” “energy shortages” etc to anticipate what the potential hurdles would be were you to do an order with a vendor in that province.

Here are some other posts about changing conditions in China and how they affect you:
Job mobility in China
China’s newfound global status
Outsourcing within China
Rising raw materials costs

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