Using an overseas 3PL to cut your international shipping costs

A couple former clients of mine have come to me recently asking me to help them find a 3PL, or Third Party Logistics, warehouse overseas. One of the clients is looking for a 3PL warehouse in China close to where they manufacture their product.  They have a lot of clients in Asia and are looking to cut their shipping costs. Currently all their product is shipped to the US and then they ship it out again to countries in Asia. So finding a warehouse in China that will ship their product directly for them is important.  The other client is looking for a contract warehouse in Europe.  They have been using one in the UK but that warehouse is closing so they are looking for another.  The interesting thing about this client is that their 3PL provider in the UK charges a percentage of sales and actually has an incentive to help my client drive sales.  This is a bit unusual as most 3PL providers charge based on volume and labor. But in reaching out to some 3PLs in Europe I did find a few who said they might be willing to work with this arrangement as well.

Needless to say, if your international customer base is growing enlisting the aid of a good 3PL can save you a lot in overhead and shipping.  However, you need to make sure you pick the right provider otherwise you risk an interruption in your supply chain.  If your 3PL suddenly goes out of business then you face a major problem with your customers, what has happened with my client whose UK 3PL has suddenly decided to close.  So longevity is a key here and you only want to pick a 3PL that has an established track record.  You also should ask for references.  Most 3PLs will be happy to pass these along.  And as you do when you look for a prospective supplier in China, there are a couple things to keep in mind:

  • Only approach 3PLs that service companies the size of your own. A large 3PL is probably not going to be interested in your business anyway.
  • Attach much importance to communication when evaluating 3PL providers.IMG_0064
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Check your orders before they leave China NOT after

I have had a lot of requests lately from people asking me to help them source in China, everything from kids clothing to electronic toys.  I do not take on just any product and usually if I am not interested in a project then I just point the person to a sourcing company in China who might be able to help them.   And the other day this was the case with a person who came to me asking me to help them source some smoking paraphernalia in China.  Not only am I opposed to smoking but I know nothing about it and for this reason I was not interested in accepting the project.  But the guy seemed nice enough and judging by the drawings he sent to me he is far along in his product development and is very serious about taking his product to market. So I gave him the name of my contact in China but I also gave him some parting advice. That advice was simply to inspect his orders BEFORE they left China.  This is the advice I give everyone but it occurred to me in that instant, when I was just thinking about one piece of useful advice I could offer someone who was about to start sourcing in China, that, yes, checking your orders before they ship from China is the only way you can guarantee that your vendor is delivering to you what you have paid for.  If you inspect an order in China and you don’t like what you see you can ask the vendor to redo the order or you can just walk away.   The most you stand to lose is your 30% deposit.  The analogy I always use when explaining this to people is the shoe analogy.  When you buy a pair of shoes the last thing you do at the register, before the sale is rung up and you take the shoes home, is to open the box to make sure the two shoes in the box are the same size, and that you have one left shoe and one right shoe.  And this is exactly what you have to do when you have an order shipping from China:  Verify.

The one caveat is that small companies or start ups operating on a budget do not have 5K to spend on a one week trip to China to inspect an order.  Or they may not see it as good business sense to spend 5K to go inspect an order, the value of which may be less than the cost of the trip to China itself. This is understandable until you figure that if that order goes badly then you will not only lose your investment but may lose customers and your business as well, assuming you have taken orders that you will not be able to fulfill.  I have one on and off client who got a bad order from China and four years later he is still selling off the defective product after repairing everything himself, piece by piece. I imagine it has also cost him a little money to warehouse the product, one container’s worth, in that time.  And this is what I mean when I tell people to take the broad view and to always see China sourcing as a long term strategy.  You may operate on razor thin margins at first or may even lose money but if this helps you get quality product to your customers and build your business it is probably worth it.

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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.

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A letter from a start up that wants to source in China

I had an inquiry from a person in Australia this morning. I get so many inquiries like this so I thought I would publish the inquiry and my reply accordingly. I think it will be useful for others who are experiencing the same frustrations in their China sourcing.

Hi,

I have read quite a number of your blogs and I wanted to ask you for some advice. My name is Robert and I am in the process of forming a startup active wear label in Australia. I have a pattern maker here in Australia so that part is covered but otherwise I am not sure how to progress forward to having my line manufactured. I have found the process to source a quality manufacturer in China who is willing to work with me both time consuming and very difficult. To start my runs will be small as I don’t know what will work for my target market and what wont. Over time this is something I hope to develop obviously, but I see the need right now to work with someone who understands China and how best to bring a product from design to production. I am hoping you can help me out or point me in the right direction.

Any help or tips are most welcome

Thank you

Dear Robert.

The first step before you do anything is to finalize your designs.  Then based on one of your completed designs I would make a special mock design for a prototype and start sending this out to vendors for feedback/ quotes. Please note that you have to be very specific about sizing and material specifications, as well as packaging. Don’t neglect any product detail. In other words, you really have to know your design and product needs inside out (no pun intended). Where most people have problems is that they have not finalized their design, and don’t understand their own product. And then they leave it to their vendor to educate them. Not only does this add considerable time and cost to a project but it tells potentially good vendors that you are an amateur.  That is not the kind of message you want to send to someone whom you are about to enter into a contractual agreement with.   Here is a little synopsis of what you need to do.

1.) Finalize your designs.  Pantones, sizing, material specifications.  Testing requirements if applicable (children’s clothing).  All packaging as well down.

2.) Project your first order QTY and target cost. Remember that the cost of your product will go up with packaging and shipping so be aware of this when you try to come up with a target cost.

3.) Reach out to vendors. Start with 20 vendors.  You can use alibaba for this or I can help you working from my file of vendors, which is substantial and generally does not cover the same landscape as alibaba.

4.) See who gives you the best price and who leaves you with the best impression as far as quality of response/feedback goes.  Watch carefully and eliminate two types of vendors as follows: those who are very slow to reply to you or those whose cost is simply prohibitive for your needs. Aim to have 6-7 vendors after this weeding out process.

5.) Go down to your local discount chain and buy a product that has similar material/packaging specifications as your own. Send pcs aka swatches of this material along with one of your designs to the 5-6 vendors you have targeted.  See what kind of revised pricing the vendors come back with. Once again eliminate vendors whose response is feeble or whose revised cost is simply too high.  At this point, maybe you have 3-4 vendors who look promising.

6.) Request samples but watch out for excessive sample fees. If a vendor overcharges you on a sample it will likely mean that they will over-charge you in production. Stay away from vendors like this.

Good luck !

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The risks of sourcing on alibaba

As much as I like Jack Ma I really have to question sometimes how effective it is to source product on alibaba. A case in point: a company in Vienna asked me recently to help them locate a supplier in China. The company has bought some health products from someone they met on alibaba but the orders have not gone too well and the Viennese company now realizes that it has been dealing with an agent and not the manufacturer itself. So they have asked me to help.

And this is one of the risks in using alibaba, namely that you really have no idea who you are dealing with. Many agents in China set up on alibaba and use the names of the companies whose products they are selling but in fact they have no association with the company. So you think you are buying direct from the factory in China when in fact you are not. For this particular project, I looked up the Chinese company in question and I found 5-6 alibaba sites for them all with different contact people listed. It looks like agents or individuals in China are selling the Chinese company’s products on alibaba simply using the company name. It is very confusing to say the least and I can understand how the company in Vienna could have been misled. But this is SOP in China so you have to be careful.

One clue that the Viennese company has not been dealing with the original manufacturer was that they had been making payments to an individual and not a company. This does not necessarily mean that one is not dealing with the vendor itself for small companies may sometimes have payment arrangements like this. I had another project recently where I was asked to pay a sample fee to an individual’s Western Union account in China which I thought was strange. But the vendor explained to me that if paying a sample fee to the bank, the service charge really offsets the sample charge. It made plenty of sense and it was not worth worrying about for a sample fee. But if you are asked to make a sizeable payment for an order to an individual you should at least try to obtain proof that the person is affiliated with the company you think are buying from. You can do this by running a credit check on the company in question and then using the contact info on the credit check to contact the company to verify who you have been dealing with. A credit check on a Chinese company will cost you a few hundred dollars but you have to see it as doing your due diligence. And in China sourcing you have to do your due diligence. Make no mistake about it.

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China, alibaba and the spirit of Jack Ma

All the news this week is about the alibaba IPO and Jack Ma. Jack Ma is the kind of person I met often when I first lived in China in the early 1990s, someone who saw China’s future not as an isolated nation at odds with the West but as a global power whose large, skilled workforce would give it a huge advantage over other countries where manufacturing had traditionally taken place. But Ma understood clearly that he needed to master English if he wanted to take advantage of the vast opportunities that Deng Xiao Ping’s reforms had presented to him and to others. And that is what he did. Largely self-taught Ma would make special trips to hotels in Hangzhou to practice his English with foreigners while he was a student in Hangzhou. He eventually learned English well enough that he became a teacher and opened his own school, a hint of the entrepreneurial spirit that lay within

When I read about how Jack Ma learned English in China 40 years ago I think back to my own experience in Shanghai 25 years ago when complete strangers would go out of their way to speak English with me. I remember vividly one time sitting by myself at a KFC on a Sunday evening poking at my mashed potatoes as a kid of about 10 came up to me and started to speak to me in almost flawless English. His English was so good I did not mind the intrusion. I knew I was in the presence of a child prodigy and I found it fascinating. After talking to him for five minutes his father came over and explained to me how he would bring his son to KFC every Sunday from the countryside so he could practice his English, a journey that must have taken 3-4 hours. It was irritating as heck when people came up to you and just started talking to you out of the blue. But at the same time you had to admire it. And if you want to understand how China has come so far in the past 30 years, from one of the poorest countries in the world to one of the richest, look no further than the spirit of Jack Ma.

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In China sourcing always try to start small

One of my former clients called me today asking me to reach out to a vendor we had worked with before for a new quote. This client has been told by big retailers he is approaching that he must be at a certain price point in order for them to carry his product. So this means we have to reduce the price with vendors in China. The only way to do this is to increase order QTY. Nothing but simple economies of scale at work here. My customer knows this and so he wants me to run some large QTYs by vendors to see what we need to do in order to get the price down.

I told him that this was all fine and dandy but I advised him that it was extremely risky to give a big order to a vendor he had not yet tested with a series of small orders. As they say in Chinese干大事必须从小事干起. ( gan da shi bi xu cong xiao shi gan qi ) trans: Before you do something big you need to do something small. Giving a big order to a new vendor is something I would never advise doing unless a person were prepared to spend a month in China supervising production. Of course the expense of doing that would offset any savings from economies of scale.

And this is the fundamental problem in China sourcing for small businesses, how do you get a vendor interested in your business at costs that work for you without giving them a huge order and assuming a lot of risk ? 20 or 30 years ago this was not a problem as China vendors just wanted the orders, big or small and the US retail landscape was not so competitive. Things are different now and vendors want big orders. Unfortunately all you can do is to try to find a vendor who you can work with and start small. Much easier said that done I should point out. The only other option is to re-design your product to make it cheaper. And right now this is what I am advising my client to do. Right now, I think that is his only shot.

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Don’t overlook product labelling requirements

There was a very interesting story last month about Target’s foray into Canada. It seems that someone, somewhere in Target’s supply chain got the UPC # wrong the result being that Target’s shipment of Barbie dolls to Canada was bottlenecked and created a major problem for Target’s entire operation in Canada. The moral of the story, check your labeling and packaging specs carefully.

But it is uncanny how often I get emails from people who have products for which they do not know the labeling or packaging requirements. For example, I had a project last year for a lady who was making a children’s garment accessory in China which she was selling online. She sent me some samples and I saw there was no care label on the product. I asked her about this and this was her reply:

“We have the country of origin on our box packaging above the UPC codes. Are you saying they need to be on the bags as well? I know we don’t have anything printed on the bags. I’ll have to look into that. “

I told her that yes, if it is a textile product, which it was, it needs to be labeled. I sent her the link to the US ITA ( International Trade Association) homepage where it is written as follows:

The U.S. Customs and Border Protection (CBP) and the Federal Trade Commission (FTC) enforce labeling laws and acts in the United States. In general, textile and apparel products sold in the United States must be labeled with the following information: the fiber content, the country of origin, the manufacturer or dealer identity, and the care instructions.
She looked at the USITA site and came back to me and said as follows:

‘It looks like we will need to add a tag to the bag that states country of origin. Perhaps up at the top, like shirts are?’

So always make sure that you know your labeling requirements before giving a product to a vendor. And a good tip is this. Proof your labels, tags, UPC codes several times and when you are done have a few other people proof them so you can be sure they are correct.

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What do you do when you are confronted with the issue of Child labor ?

Someone wrote to me the other day telling me they were looking for a vendor in India because they had customer who did not want product made in China, because of the association of China with child labor. I can understand this because the customer is a Global Brand and if there were any association between the customer and child labor that would be very bad PR for the customer. I am not sure things are much better in India but I don’t know because I do not do a lot of business there.

I have seen a lot of child labor in China over the years. I think things are much improved there now under the commitment of the Chinese Govt, especially in the big cities, but if you go deep into rural areas you will inevitably see child labor in the factories or at the cottage industry level. In many cases it may just be a few kids running around the factory floor helping out their worker-parents ( more play than hard labor). In other cases it may be small children officially engaged in production. The best thing you can do in this situation is to mention it to your vendor but try not to sound too indignant. After all the US and other developed countries have their own history of child labor. The Chinese are well aware of this and if they don’t point it out to you can be sure they are thinking about it. . You can of course choose not to do business with a factory where you see child labor but depending on your product and the region where you are having it made you might have a hard time finding any factory that was in compliance with Chinese and International child labor standards. .

How do I handle child labor when I see it ? I will mention it to the factory boss and tell them it makes me uncomfortable.. Fortunately in China these days you can have these frank discussions with your vendors on issues like pollution, corruption, child labor etc. The reality however is that unless your orders are very big and you have a presence at the factory, the problem is not going to disappear. It will just disappear when you are there. If I am in China on behalf of a US or Canadian company I am working for I will mention what I see in my in my reports and advise the companies I was working for to consider child labor a very negative mark on the vendor. If we are in the process of vendor selection then the presence of child labor during an audit would be a good reason not to choose a vendor.

In the end though if you want to do business in China you just might have to put up with unsavory practices like child labor, for it is one of the harsh realities of doing business in the developing world. And remember there are two Chinas, the developed China i.e. urban China and the underdeveloped China i.e. rural China which is 60% of the country.

But make no mistake about it things are getting better. As the Government urbanizes more land problems like child labor will eventually go away.

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Don’t pay someone $500.00 to do a spec sheet for you. Do it yourself.

The other day I was looking at the website of a China sourcing company. This is a western managed company with an office in Shanghai and they offer the full range of China sourcing services, product development and design, sourcing, QC, logistics etc etc. But I was surprised to see that they charge over $500.00 just to do a specifications sheet for a customer. That is a shocking amount of money for something that is really pretty easy to put together. Making a spec sheet may take you a couple of hours, between taking and downloading photos, and in some cases photo-shopping them, and then getting all the product details in order. But it is not all tedious and in some ways can be a lot of fun. I personally enjoy making spec sheets.

Every good spec sheet should have the following info:

Product description including your company’s model or SKU
Product dimensions
Material content
Pantones ( to indicate product colors if applicable)
Label specifications
Packaging specifications
Testing requirements (if any)
Price (if quoted)
Target Cost (if seeking a quote)
Order QTY
Order QTYs in increments of 1000 or 5000 ( if seeking a quote)
Special Instructions ( there are always some)

A good spec sheet will include photos of the product from every angle possible, including perspective shots and ALL product dimensions should be indicated. Regarding material content you should be as specific as possible. For example instead of just indicating your product is made out of cotton you might need to indicate “cotton jersey” and then give the weight because cotton jersey comes in many weights (oz per linear yard) and vendors need this info to quote for you. When doing a spec sheet always work under the principal that no detail is too insignificant to be included.

A helpful tip is this: request that your vendor do a spec sheet as well once they have your product in hand.. They may include details that you have overlooked. Or they may not have included details/instructions that are important.

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