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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Outsourcing in China. Get used to it.

http://www.theeastasiaco.com

Outsourcing is a paradox. It is a practice that is often necessary for the long-term health of a business or organization and at the same time it is a concept that engenders considerable animosity among electorates esp. in election years. When US companies send jobs overseas, for example, American jobs are lost. But many more jobs might be lost if a company refused to outsource, was unable to meet the high cost of US labor and went out of business. Like it or not, outsourcing is simply one of the realities of Globalization. It is unavoidable.

In China these days, some companies in provinces where the cost of labor and materials is high have begun to outsource orders to other areas within China where costs are lower. These outsourcing factories, usually in coastal provinces, simply cannot compete if their costs are too high. In fact if you do an order in Eastern China or South China and part of it is not outsourced, that is highly unusual. One vendor wrote to me:

“For the labor cost, because zhejiang is developed area in china, so the labor cost is not cheap,but will cheap than guangdong I think.And some factory now buy the material and send to west china workshop to handmade it, for the cost is much cheap. Like some jewelry order we have, we buy the material and send to our jiangxin workshop to make.”

Many US companies are uncomfortable with the practice of outsourcing in China because it renders their supply china less transparent. For some industries with strict safety standards, e.g. construction, pharmaceuticals, toys etc outsourcing can be a real headache because there is sometimes no way to know if subcontractors are qualified and are using parts and materials in accordance with international safety standards. Other industries where product safety is not so much an issue nevertheless worry about outsourcing because it may lead to inconsistent quality over production lots. At some point though you have to accept that outsourcing is normal and you should not be discouraged if you find out your vendor is outsourcing part of your order. What is important is to make sure your vendor has very strict procedures as regards subcontractors and is not accepting product into his factory that does not meet your company or order standards. A simple visit to your vendor’s factory is usually enough to determine this. Once again this is why getting on a plane and going to China to see for yourself is so important when you do business there.

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