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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Never let your guard down when you manufacture in China

There was an article in the Shanghai English Language paper recently about defective products being sold in Shanghai stores.  Apparently about 40% of the apparel sold in Shanghai area dept stores reveals defects, everything from excessive formaldehyde to misleading labels. A sweater, for example, was described as 100% wool but it turned out to have only about 20%  wool content. The same old China song and dance in other words.  Still I was a bit surprised to read this kind of story because over the years the quality of product made in China has gotten much better as overseas importers have imposed stricter requirements on their Chinese suppliers and as a growing and more affluent Chinese middle class has come to demand higher quality from domestic vendors.  The story illustrates however that the Made in China brand is still plagued by the quality problems that have been associated with Chinese products over the last 30 years.  In other words you can never take your guard down when you manufacture in China.   You still have to test your products at regular intervals and make sure your vendor knows your standards and is maintaining quality and safety standards.   Here is the link to the article

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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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Using mock-up prototypes when approaching new vendors

I had an email from a former client this past week.  She is the founder of a company that makes a popular line of kids bags and she is looking for new factories in China.  She had a strategy question for me as follows:

“I am sending samples for pricing from a factory that came highly recommended and of course they are asking how many SKUs etc. I have not actually revealed my brand as yet because I don’t want them to base their pricing by looking at our website prices. Do you think that this is wise? Or should I send them our catalog so they can see all of our SKUs and then give them target pricing ? Which do you think is a better strategy? “

This is a good question and I replied to her as follows:

“It is always a fine line to tread between being paranoid about things and being careful.  

I personally never recommend revealing your brand until it is absolutely necessary and I usually advise people to have mock ups without branding to submit to prospective vendors.  But if you feel they may know who you are already since you have been communicating with them or because you came recommended from someone else who has used them, then it is probably not a good idea to try to conceal who you are. 

But this leads me to a good point and that is that I think it is a good idea to have some mock ups made up from your current vendor so that in the future you can approach prospective vendors without revealing your company and retail pricing.   First costs from new vendors are important because those costs serve as the basis for your first few orders.  If they are high to begin with then when your vendor starts raising costs on your 2nd or 3rd orders ( as often happens) you may be priced out of doing business with them quickly.    If on the other hand you can negotiate a low first cost to begin with then even when the cost goes up you may still be able to hit your margins while you fulfill orders and look for a new vendor.  Making sure your vendor does not know your retail pricing goes a long way in keeping your first costs low. And mock-ups will help you achieve this.” 

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Toy testing requirements for US importers – an overview

I had an email from a Chinese testing lab the other day that outlines all the testing requirements for Toys sold in the US. I thought it was a pretty good summary of where you need to be as far as product testing goes depending on your product and so I thought I would post it here this week (edited and posted below).  Just an FYI, under the Consumer Product Safety Improvement Act of 2008 all toys sold in the US must comply with certain product safety regulations. The section of the Act that covers toys is known as ASTM F963. ( American Society for Testing and Materials) If you are reaching out to Chinese manufacturers with a toy design make sure you know the testing requirements for your product and pass these on to your prospective supplier.

After reading the list below to see where your product falls, you should  spend some time on the ASTM website ASTM website to read more about the safety standards and see what you need to do to get your product in compliance.  Testing labs in China also know the standards ( since they are the ones testing the products) but it is  a good idea to make 100% sure you know as much as they do and that you neither overlook something you need to test for nor have superfluous and costly tests done.

Here is the overview:
ASTM F 963-11 Requirements
When you certify in a written Children’s Product Certificate that a product meets ASTM F 963-11, you must include the specific sections to which you are certifying compliance.

Also, toys may be subject to regulations enacted under the Federal Hazardous Substances Act (FHSA), such as requirements for small parts, pacifiers, rattles, etc., many of which are cited below. Check the list of products requiring third-party testing and regulated products to ensure that you are in compliance with all applicable regulations. Yes indicates the product must undergo testing; No means testing is not required.

Group 1: Sections Applicable to Most Toys

As mentioned above, the following requirements must be met for most toys. All toy manufacturers should review these sections to ensure that their products are in compliance.

Section Title Requires Testing at a CPSC-Accepted Laboratory

4.3.5.1 Heavy Elements: Paint and Similar Surface Coating Materials Yes
4.3.5.2 Heavy Elements: Substrate Materials (Note: Many toys intended for children under 6 and all toys intended to be mouthed or contact food and drink are subject to this requirement. See the standard for more.) Yes
4.3.6.3 Cleanliness of Liquids, Pastes, Putties, Gels, and Powders Yes
(Except for cosmetics and tests on formulations used to prevent microbial degradation.)
4.6 Small Objects  Yes
(Except no third party testing is required for labeling and/or instructional literature requirements)
4.7 Accessible Edges Yes
(Except no third party testing is required for labeling and/or instructional literature requirements)
4.9 Accessible Points Yes
(Except no third party testing is required for labeling and/or instructional literature requirements)
5 (Entire Section) Safety Labeling Requirements No
6 (Entire Section) Instructional Literature No
7 (Entire Section) Producer’s Markings No

Group 2: Sections Applicable to Specific Types of Toys 

The following set of requirements is for specific types of toys or toys with specific attributes. All toy manufacturers should review these sections to ensure that their products are in compliance.
Section Title Requires Testing at a CPSC-Accepted Laboratory
4.1 Material Quality No
4.2 Flammability Excluded by CPSIA No
4.4 Electrical/Thermal Energy** Electrical Toys. See 16 CFR 1505.
Yes, to 16 CFR 1505
4.5 Sound-Producing Toys Acoustic Toys Yes
4.8 Projections Sharp Points Yes
4.10 Wires & Rods Sharp Points Yes
4.11 Nails & Fasteners Sharp Points Yes
4.12 Plastic Film Yes
4.13 Folding Mechanisms & Hinges Enclosed/Hinged Toys Yes
4.14 Cords & Elastics in Toys Corded/Elastic toys Yes
4.15 Stability & Overload Requirements Ride-On Toys and Toy Seats Yes
4.16 Confined Spaces Enclosed/Hinged Toys Yes
4.17 Wheels, Tires, & Axles Yes
4.18 Holes, Clearance, & Accessibility of Mechanisms Enclosed/Hinged Toys Yes
4.19 Simulated Protective Devices Yes
4.20 Pacifiers Yes
4.21 Projectile Toys Projectiles Yes
4.22 Teethers & Teething Toys Yes
4.23 Rattles Yes
4.24 Squeeze Toys Non-Rigid Toys Yes
4.25 Battery-Operated Toys Yes
4.26 Toys Intended to Be Attached to a Crib or Playpen Infant toys Yes
4.27 Toy Chests (ASTM F 963-07e1) Enclosed/Hinged Toys Yes
4.27 Stuffed & Bean Bag-Type Toys Non-Rigid Toys Yes
4.28 Stroller and Carriage Toys Labeling requirements only No
4.30 Toy Gun Marking Projectiles Yes
4.31 Balloons No. Label in accordance with 16 CFR 1500.19 and 16 CFR 1500.20.
4.32 Certain toys with Nearly Spherical Ends* Spherical toys Yes
4.33 Marbles Spherical toys. No. Label in accordance with 16 CFR 1500.19 and 16 CFR 1500.20.
4.34 Balls Spherical toys. No. Label in accordance with 16 CFR 1500.19 and 16 CFR 1500.20.
4.35 Pom Poms Non-Rigid Toys Yes
4.36 Hemispherical-Shaped Objects Spherical toys Yes
4.37 Yo-Yo Elastic Tether Toys Corded/Elastic toys Yes
4.38 Magnets Magnets Yes
4.39 Jaw Entrapment in Handles and Steering Wheels Yes

Other Requirements
Section Title
4.29 Art Materials (16 CFR 1500.14(b)(8))
Yes, to 15 USC 1278a(Total Lead Content).
4.3.7 Stuffing Materials Yes. Stuffed toys with all new stuffing must meet 4.1, no testing at CPSC-accepted laboratory required to this section.

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Establishing if your vendor is trustworthy

I had a discussion the other day with a consumer goods company which I found very interesting. This is an established company, a leader in its field, that makes packaging for some of the biggest retailers in the world.  The person I spoke with told me his company’s process for evaluating vendors in China, specifically how they decide who might be trustworthy and who not.  When they source new vendors in China they tell the vendor that they have a order from a large retail chain, one that the vendor has likely heard of e.g. Wal-Mart, IKEA et al.  They intentionally drop the name of the customer on the vendor. They then wait to see if the vendor contacts the customer directly. If the vendor contacts the customer, that tells the company that this is not a trustworthy vendor.  If the vendor does not contact the company, they then believe they are OK going forward with this vendor.

If you are a big company this is probably a good way to knock out a few unscrupulous vendors when you are sourcing a new vendor.  The strategy has worked for the company I talked to.  They have several vendors who they have been working well together with for years, and many more whom they have eliminated because the vendor approached the retail customer directly.

But if you are a small company is this a good way to select vendors ?  I think it all depends on your relationship with your retail customer.  If you have a solid relationship with your buyer then you can try this. Your customers have come to expect quality from you and it would be unlikely that they would seek to go direct to the factory in China, even if cost savings were substantial. The fact is that your retail buyers are paying you for the convenience of getting product made in China for them.  They have no interest in dealing directly with China vendors and resolving all the problems that usually come with a China order e.g. QC issues, cost increases, late delivery etc etc.  In fact, the company I talked to the other day told me as much.  He said that the number one reason companies pay him to source their products in China is that they have a much better chance of holding a US company accountable in case something goes wrong.  Makes sense as any kind of legal action in China is time-consuming and costly.

At the same time, if you are doing orders with a large retail chain but have not yet established yourself with the buyer(s) then I would not try this for the simple reason that if the retailer already has an overseas sourcing agent they might use your contact and place the order directly with the factory. Although I don’t think it happens often, I have worked in companies where it has happened.  And this is why most product development companies and wholesalers are very protective of their information.

In the end though, you have to remember that there really is simply no way to know which vendors are trustworthy and which are not. Just because a vendor does not contact a customer whose name you have dropped does not mean they will not act dishonorably later on.  Because of this when you source in China the bottom line should always be whether or not a vendor is helping you build your business.  As long as they are doing nothing illegal and your business is growing it should not bother you if they are sometimes dishonorable in their dealings with you.  A case in point, I used to work in an office of an American company in China. The owner of the company told me he knew some of the local employees were on the take with the factories.  But since he saw these employees as knowledgeable, hard-working and productive, and the business continued to grow, he simply chose to look the other way.  I think that was the smart thing to do.

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Why incentives from US companies are rarely effective in China

It seems that every company I have ever worked for has tried to implement an incentives program for vendors in an effort to get them to produce quality product and ship on time. I once worked for an American textile company, the owner of which had the idea to reward top performing vendors with trips to the US home office. What management of the textile company did not understand was that most of the vendors had absolutely no interest in getting on a plane and going to a country where the Chinese food in a five-star restaurant was probably inferior to the gruel they were accustomed to eating in their own factories. Not surprisingly, the incentive program was a failure. Another company I was employed by gave brass plaques to its top performing vendors, only to find that quality showed no improvement and, in some cases, got worse.  I mean what of what value is a brass plaque of recognition from an American company to a vendor far off in China ?  The answer is very little.

Providing vendors or workers with incentives is a classic example of a management program that works in the US but does not work in China. Why don’t these incentive programs work in China? I think there are a few  reasons:

1.) In China there is sometimes a tremendous degree of mistrust in personal and business relationships (perhaps the legacy of the Cultural Revolution when neighbors turned on neighbors). Most vendors regard incentives from US companies with a great deal of skepticism. They simply do not believe you will pay up, so to speak.

2.) More importantly, many vendors endured the bone-grinding poverty of pre-reform China and lost myriad career opportunities during the Cultural Revolution. For this reason, vendors have a “cash-in-now” mentality, and focus mainly on short-term gains. It never ceases to amaze me how few vendors in China look at relationships with American customers as long-term and mutually beneficial.  Of course incentives are part of a long-term program.

3.) To meet production goals requires vendors to invest more in production.  Yet vendors do not want to invest more in an order than is absolutely necessary.  No vendor in China is going to spend more out of their own pocket to get an order out on time simply because they covet that brass plaque you promised them.

More importantly offering incentives to your China vendor may in fact be counterproductive. If you give your vendor production or QA targets, he may feel he has reached these while you feel he has not. This just leads to conflict, an erosion of trust and you are soon looking for a new supplier. I have seen this happen.

For these reasons, it is probably best to avoid offering vendors any kind of special incentives. The best you can do is tell them they will get more business from you if the current order goes well, work closely with them on quality and hope they follow through accordingly. On your side, do everything you can to make those order QTYs bigger with each order.

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When you do business in China, leave your Nationality at home

I was watching an interesting program on NHK, the Japanese network, the other night.  The program, broadcast weekly, is entitled “Professionals” and shows people engaged in various professions in Japan, everyone from, say, a violinist with the NHK Philharmonic to a waiter in a non-descript udon restaurant.  The installment the other night featured a well-known female civil engineer, Reiko Abe, who has faced considerable discrimination in Japan because she works in a male-dominated profession, tunnel engineering.  Her solution to the problem is to work for a Tokyo based project management firm that stations her abroad, in countries in need of expertise from Japan e.g. India and Indonesia.  Two of the projects she has worked on in recent years are the subway system in Jakarta and the bullet train in India. Denied upward mobility in Japan, she is now regarded as one of the top tunnel engineers in the world.

It was an interesting program not only because it shows the depths of discrimination that women still face in Japan but also for one revealing line Ms. Abe uttered when asked how to explain her success in a country like Indonesia, where building standards and a sometimes feudal mentality among workers are barriers to modernization.  Abe said the key to her success on overseas projects is that she always “throws away Japan before going abroad.”   I thought that was an interesting way to put it, in other words, that Ms. Abe gives her national identity all the value of an empty can when she is working abroad.   But this is what she does when she goes overseas.  And this is why she is in such demand now for high-profile international projects. In a foreign country, she obviously knows how to adapt and get things done.

And this is what you have to do when you do business in China.  Adapt. You cannot be weighed down by your own customs and flummoxed by unfamiliarity.  A case in point is former colleague of mine.  Whenever she visited China she would insist on being driven back to her hotel everytime she had to use the bathroom. She just refused to use the bathroom in the office or factory.  The exact opposite of Ms. Abe.  Needless to say, the Chinese did not enjoy working with her and her projects never went smoothly.

So the next time you are about to get on a plane to China and you see the bin where you have to dispose of all the things that are prohibited on board, make an additional imaginary bin in your mind that says Items Prohibited Beyond This Point:  Your Nationality.  

Here is a story and interview with Ms. Abe from Bloomberg. Reiko Abe feature

 

 

How to ship orders from China which are too small to go in a container

I sometimes get inquiries from people who have a small order they want to ship from China. And this is when they realize that the cost of overseas sourcing suddenly goes up. Simply put the smaller your order is the more expensive it is to ship. It sounds paradoxical but it is true, and for this reason: you pay a fixed cost for the container from China to the US so the more product you can get in that container, the lower your shipping cost per unit is. If for, example you are paying $2500.00 for the container (a standard rate for a 40’ container from China to the West Coast of the USA) and you are packing in 3500 pcs you will pay $0.71 in shipping costs per pc. But if you can pack in only 2500 pcs your shipping cost per unit goes up to $1.00 per pc, a substantial increase. And this is why packaging is so important and why you want to utilize space as efficiently as possible.

If you don’t ship a full container then your next option is LCL which can be expensive, bureaucratic and can subject your shipment to a sometimes lengthy delay if another shipment in the same container has to be inspected. In fact, LCL can be very slow because there are sometimes so many other shipments in the same container, all of which need to be processed in due course. The only time you may want to use LCL is when you simply have too big an order to make air-shipment viable or you want to get product to market as quickly as possible, not wanting to wait until your demand justifies ordering a full container. Let’s say, for example, that you have orders that will fill 70% of a container. You have a choice which is to waste 30% of the container, thereby adding cost to your product, or ship LCL, saving cost on shipping and probably getting your product sooner than if you had to wait for orders to fill a container.

And then there are the really small orders, that shipment of, say, ten cartons for a business just testing the waters on a product. Probably the best way to ship orders like this is to use China’s express courier EMS. EMS is China’s equivalent of FEDEX but is generally cheaper than the other major international couriers, by at least 25 % in my experience. Not only is EMS cheaper but your shipment will likely encounter few problems when it leaves China whereas if you ship one of the other major carriers e.g. DHL, FEDEX, UPS you may risk lengthy delays because China Customs is more likely to scrutinize the foreign companies. I can recall on a couple of occasions over the past four years where there was a problem using one of the above carriers because of a problem with China Customs. In one case a foreign courier had violated a Customs regulation which meant that they were not allowed to ship a certain product out of China. Needless to say, this is more likely to happen with a foreign courier than with a Chinese courier. So to be safe just use EMS, even if you have your own FEDEX or other account.

Finally if you don’t want or can’t use EMS for some reason (maybe you get a hefty discount from FEDEX for example) then my second choice would be FEDEX or DHL, simply because most vendors are familiar with them. From my experience UPS is the carrier you should avoid because many vendors have no relationship with UPS and prefer not to use them.

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An India vendor in the hand is worth two China vendors in the bush

I had a call a few weeks ago from a woman who runs a small home décor company here in the US. She has built her business sourcing in India and I guess has had some measure of success judging from what she told me about her business and her list of retail customers. But now she is growing weary of India. I asked her why and she replied that Indian vendors are raising prices all the time and have become difficult to deal with. I asked her why she expects things to be different in China, adding that she really should not expect a whole lot of difference between India and China, for both places present their own challenges when it comes to sourcing. She replied that she knows China is a difficult place to do business but that she wanted nevertheless to leave India and start sourcing in China. I really could not say much to that but my thinking has always been that if you have built your business with one vendor it is probably a good idea to stick with that vendor as long as you are still turning a profit. Only when things really start turning south should you start looking for another supplier. Similarly, if you have done well over the years in India my advice would be to stay in India and maybe just make some brief forays into China.

After telling me about her business the woman told me that she wanted to attend the Canton Fair this spring which at the time she called was only a few weeks away. That is not, I thought to myself, how one attends an international trade fair. I explained to her that attending the Canton Fair usually involves a few months of preparations e.g. emailing vendors you want to visit, ordering samples, scheduling visits not to mention flights and hotel reservations. If you do not do all that you are really just wasting your time and money because the fair is just too massive to go unprepared. And there are just so many bad vendors that an initial screening of vendors is really necessary.

Anyway, the call concluded and I did not hear from her again. Not even a note after I sent her a follow up email. For some reason people don’t like it when I discourage them. But as I see it if I don’t tell it like it is then I am not giving good advice.

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