China’s development might give the impression that sourcing from the country has become a mature, standardized process. That cannot be said to be the case.
China is the world’s factory. It has been on a steady path to that title since reforms began 30 years ago. No doubt Chinese suppliers have gradually become more sophisticated over that time, dealing with ever larger pools of overseas buyers; indeed, a record number of visitors were invited to this year’s Canton Fair.
But buyers need to beware. As helpful as understanding the local environment can be, it is equally helpful not to forget simple common business sense relevant in any market.
Here are the top 10 mistakes when sourcing in China and how to avoid them.
Mistake 1: Poorly Defined Specs
One of the most common mistakes made when sourcing from China is not being precise enough about specifications with the supplier. This can lead to a range of problems, such as a barcode that is too big or small and therefore unreadable to a scanner. Or the supplier is given the freedom to handle the product design, such as deciding on the materials packaging layout. This can lead to a final product that is substantially different from the original concept.
One unintended consequence of that could also be that the supplier may think their input into the design means that they own the intellectual property rights (IPR) to the product. Defending IPR infringements is a tough proposition in the best of circumstances, so it is crucial not to let “design for manufacturing” lead to “design from supplier”.
A simple solution here is to separate engineering from manufacturing to protect the product design. Make specifications extremely clear so that there is no room for error.
Mistake 2: Not Knowing the All-In Cost of the “China Price”
Sourcing the product is only the first step: There is a lot more additional work to be done. Next is to know what the key costs are that make up the all-in China price to ensure maximum value.
Investment in Tooling
The buyer may have to provide equipment to the factory. This is especially common for customized products where a specific mold is needed to ensure the design of, for instance, the logo is correct.
Insurance for Tooling
The buyer has to be responsible for the safekeeping of their own equipment and to protect it from being used by the supplier to copy the product. ‘Stewarding’ services are available where a third party looks after the equipment when it is in the factory and takes it away after the order is completed.
Shipping and Logistics
Know the all-in price of shipping rates.
Exchange Rate Volatility
Fluctuations in currency rates can lead to the product price changing after the initial agreement with the supplier is inked. With the recent doubling of the Renminbi’s daily trading band versus the Dollar, those changes could introduce more volatility. Try to buy in Renminbi to lock in the price.
Last minute long-distance travel and accommodation can be costly but necessary for factory visits, troubleshooting, etc. Having someone on the ground via outsourcing can be less expensive. It pays to take the time to ask around and go with a recommendation where possible.
Mistake 3: Failure to Conduct Due Diligence
Trade fairs can be bewildering places, full of glitz and glamour as suppliers pull out all the stops to attract business. Often what is seen at the stand is not the reality on the factory floor, and this can only be known with a visit to the production facility. Another worry is that the trade fair rep is actually an intermediary or trader.
Due diligence can be a long or short process, depending on the needs of the buyer and the sensitivity/complexity of what is to be made. It can range from a simple request for information, such as a copy of the business license and customer references, to more investigative verification, such as checking on the financial balance and working conditions of the supplier. The latter require face-to-face interviews and undercover work that a foreign buyer would need to outsource.
Mistake 4: Failure to Audit the Factory
Factory audits and quality control (QC) are essential to China sourcing because the supplier’s guarantee is never enough. Suppliers will have the perfect sample on hand to secure the contract, although the end product can be (and many times is) of a far lower standard.
In order to make sure the product is of good quality and adheres to international standards, an external QC expert needs to inspect and certify it. Again, taking the time to find a person that can be trusted or getting a recommendation can improve the chances of things going to plan.
Support by China’s leading Corporate & HR Specialist, New Horizons Global Partners
New Horizons’ China market experts support foreign companies in their strategic development with high-end administrative expertise. Get in Touch.