So you’ve chosen to source your product from China - great choice!
Here’s my look at the top three problems you may run into when sourcing from China (and my advice on how to avoid them).
In my opinion, the top 3 problems are:
2. Overestimating Profit: Not Knowing Your Numbers
There we go. Job done. Article over.
For those of you who’d like a little bit more than just a list we’ll dig into these three points in more detail below.
If you'd like more information about "Asking the Correct Questions When Manufacturing in China" then click the link to read our thoughts on the subject
Communication is vital and making sure that you communicate effectively is key to negotiating with factories in China (and anywhere around the world).
Clarity and keeping things simple is paramount. You need to be as clear and concise as possible. There’s several tips that can help with this:
- Communicate with one main contact at the factory. Find your key person and build a relationship with them
- Arrange a face to face meeting - obviously it is not always possible but a face to face meeting is a great way to begin/develop your relationship. It humanises you and stops you just being one more voice in the noise
- Avoid making someone lose ‘face’. China is a ‘face’ culture and an excellent way to help build the relationship between you and your contact is to not make them look bad to their boss.
- Utilise Phone calls – they are a great tool. In fact, you can often learn more about a situation by speaking to your key contact on the phone. Maybe they feel more comfortable asking you a tricky question this way (and it’s helpful to avoid losing face)
- Always confirm what is discussed over the phone and in person in writing (even if it’s just to say that you will answer the question later)
- Put together a QC checklist of everything you’ve agreed with the supplier so that they can tick off things as part of the production process (be aware that this only helps remind them - if they've not understood something this is unlikely to help)
It’s a given that in the absence of direct, clear information from you the factory will make assumptions. It’s also a given that those assumptions will not match up with your expectations.
Try to keep in mind the age old acronym KISS (keep it simple stupid). Keep in mind that you are (mostly like) communicating with someone who speak English as a second language. Simplicity will help keep things clear.
Overestimating Profit: Not Knowing Your Numbers
There’s more to sourcing a product than just the cost price from the factory. You need to know your landed price as well.
Your landed price is the cost of the product in pound sterling (or the local currency) once it has landed in your country. This includes the cost of the product and then several other costs.
Most likely your payment terms with the factory are FOB which means that the price covers the cost of the product and the cost of getting the product from their factory to the port in China that the good will be shipped to the UK from. There are different payment terms, like ExWorks which would not cover this. You would need to cost that separately.
You will need to know the following information:
- Product cost (which will almost certainly be in US$ so you would need to change into pound sterling or your local currency)
- Shipping cost from China to your UK address
- Duty rate that HMRC will charge on your product (which can range massively and could have a massive effect on your profit margin)
- VAT amount you’ll owe (20% in 2017).
You’ll then need to think about delivery and warehousing. Where will you be storing the product and how much will it cost? There are “Pick and Pack” places that can store and send out your product.
Will you be using Royal Mail to send your product? If so, which weight category does it fall under? Is there a cheaper competitor?
Then you need to think about your selling platform. Will you be selling through your own site? Or will you use eBay or Amazon? Whatever platform you use you’ll need to factor in their percentage and whatever payment service you use (PayPal for example) will also take a percentage.
All of this needs to be factored in when you’re running the numbers to ensure that the product you are selling is profitable.
There’s three main scenarios where a factory might sub-contract.
Scenario A) They’ve said yes to making your product and agreed the timetable but realise that they don’t have space in their production schedule! They now need to use a sub-factory to do the work to keep with your timetable.
Scenario B) There is a component that is part of your product that they are buying in. For example, if the factory is making a bicycle they might well be experts in making the frame but they might buy in the pedals or the seat.
Scenario C) You’ve made contact with a trading agent NOT a factory.
Scenario C is probably the most problematic scenario. The trading house or agent will add very little to your experience other than cost. They will literally just be another person in the chain between you and the factory.
In Scenario A, you do have some options. You could insist that the factory that is being sub-contracted to meet the same standards as the original factory. In this case, you could arrange for a visit by a third party to double check the standard and the certification.
Equally, you might want to insist that the product is made by the factory that you’re talking to. You can liaise with them to find a gap in their production schedule.
However, you need to be aware of the importance of your order to the factory. If you’re ordering a small amount of a cheap product then you will need to manage your expectations. Do not expect perfection for small batch orders.
In Scenario B, it’s slightly more difficult. Realistically, the factory will have specialised - in this example - in the bike frames. They’ll then link up with other factories that are experts at making the additional components. Now, if you were ordering millions of units then you could discuss the factory being additional tooling, training additional staff and bring all the components under one roof, but smaller orders will mean that it’s unlikely to be cost effective (for any party involved) to not use the subcontracted expert factory.
In this case, there is an onus on you to check which parts of the product are being made by the original factory. Do they do everything in house? If not, what is the relationship with the supplier of the components that they buy in? If they’ve been working together for 10 years then maybe it’s less of a problem. The key issue in Scenario B is to ensure that the QC from the subcontracted factory is up to scratch.
It’s a judgement call, to a degree, but (as with Scenario A) you can check the certification, insist on a high standard of QC and generally manage the project as you see fit. Equally well, you could just decide that you trust the factory and let them do their thing. It’s down to you.
None of these problems are insurmountable, but keeping them in mind when ordering from China will help you to get the best out of the experience.
Equally well, you may find that you'd prefer to use a service like GHL Sourcing. If that's the case then please do get in touch. We'd be happy to help.