Silk Road International Blog

More questions from buyers at the Global Sources China Sourcing Fair in Hong Kong.  This was the last day of the show so I’ll be back to more of the usual fare starting next week.  But I think that the questions poised were helpful in illuminating some of the common misconceptions and concerns about sourcing and purchasing in China.

1.    Buyer Question: My quantity’s are small, how do I get good prices from Chinese suppliers?

You don’t.  There are reasons for being in China, and small qttys is not one of them.  If you are not buying in quantities as large as your current domestic distributor (or will soon be buying these qtty) you are probably not ready to be in China.

Just because you know you can get things cheap still doesn’t mean that China’s right for you.  China is best for millions of the same thing.  Not thousands of hundreds of things.  Or, as one buyer talked with me about, a couple of 10-15 things.  Even if your product items are large dollar value item (hundreds of US dollars per piece) you are probably still better off buying from a domestic distributor than from a China supplier.

Further, because you are getting lower cost you need to understand that there is a trade off in a lack of oversight/QC as well as logistics and importing responsibility.  If you are buying small quantities and you can’t afford to do some of the QC and shipping/importing yourself then you shouldn’t be buying in China.

If you are just starting out your own retail business and you are going to be buying stock items in quantity’s that are appropriate for a small retail you will most likely find China a bit beyond what you can realistically manage or afford.

Chinese suppliers want to run large lots, one time, for confirmed orders.  Typically suppliers’ margins are small and within the environment of changing exchange rates and domestic inflation suppliers lose money to product goods and then wait for a buyer.  They do not like to carry any stock and so buying in small quantities is tough.

2.    Wow. I can’t believe how good the prices are here.  I should have come sooner.

(Yea, I know it’s not a question, but everyone says this and so I wanted to respond a bit.)

First, yes, the prices are better than what you get from your home distributors, but what’s missing?  Quality?  Shipping?  Duties?  QC?  All of these important things are what you’re cutting out by going direct.

Second, don’t be too excited.  Play it cool or you’ll never get any better pricing (and you should).  I prep all my clients coming to China that they should act disappointed and a bit frustrated when visiting factories.  It’s almost impossible to negotiate prices with a factory who knows that the client is already thrilled about prices.

Third, what are the quantities that are required to get this great pricing?  Often at the show you’re expected to order “a full container” as an MOQ.  I’ve never bought “a full container” as a qtty of anything.  Ever.  But at the show (with costs for int’l travel, shipping, booth registration) they want to get as many big orders as possible.  Once the show is over the MOQ will be more manageable, but it’s still not going to be small (see above) so don’t get you’re hope up for 100’s of a few pieces and don’t get mad if they don’t want an order for a retail shop.

3.    I’m working in a very price sensitive market—how do I get the best prices and still keep the quality I need to have?

You can have two of the following qualities in your production: good quality, low prices or very fast delivery times.  You don’t get all three.  Ever.  So if low price is your priority, you need to be a bit flexible on times or quality.  This means that the farther out you can prepare and the longer that you can wait for delivery the better quality and lower prices you can get.

Another way to get better pricing is to order larger quantities.  Larger quantities with good lead times can help you save significant amounts of money per piece.

For example.  Last year we made some Christmas ribbon for two different clients.  One client had 4 SKU’s with 3 different ribbons in each SKU.  Each SKU had more than 10,000 yards per ribbon.  The second client had 12 SKU’s of ribbon with 6 ribbons per each SKU.  Each SKU had 5000 yards per ribbon.   For both client, each SKU had a total of 30,000 yards.  But the cost and time per SKU for the first client was ½ of the other.  Because of the smaller number of pieces within each SKU, the first client had lower costs per yard as well.  Sure the second client had 4x the total quantity.  But because of the high number of SKU’s and the higher number of different pieces per SKU the order was seen as much more difficult and much less per ribbon-production-run than the first client’s order.  Chinese suppliers want orders that are large total quantity’s and a small number of SKU’s and small number of pieces per SKU.

My experience has been that negotiations in Chinese (i.e. hiring a Chinese rep) gets you better prices.  A foreigner walking into a show booth in Asia to buy says a couple of things.  First, I’m not local.  This implies  (to the Chinese supplier) that you have more money than the locals.  Second, it says I’m only here for a week so I need to get this done ASAP.  Suppliers know that you don’t have a lot of time to negotiate and have money to spend.  Third, I’m used to prices that are much higher than what I’m seeing here so I’m only going to bargain half heartedly and maybe for only a very small percentage off of the offered prices.

If price is really the motivator in your market then you need to invest in some time–come to the show and then go the factories and spend weeks, not hours, here in China bargaining and negotiating prices and quantities.

4.    Best advice at the show for saving money and time NOW: Don’t waste time trying to manage your own shipping.  Just give it to a 3PL like Schenker from the very beginning.  Negotiate rates up front, but once you’ve done that let the 3PL do all the rest.  Focus you time and energies on your own job and let the 3PL manage all the customs, logistics and international paperwork.

Tags: Business by david
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Notes from the Global Sources Show in Hong Kong, 21st April.

Best new presentation of the show was from Mr. Francis Yuk, the Vice President, North America of Intertek. It’s too bad that this isn’t a recording as the presentation was really enjoyable.  But here are my notes; it was a great overview of the issues that now influence your testing/QC needs in producing in China. Here are some highlights.

• Recently, in the last 10 years, there has been a shift of priorities from simple price/function/quality to include the issues of Social Compliance/Environmental Protection/Intellectual Property. In addition, there is a much shorter time for the overall production cycle. And despite the increase in the number of smaller buyers, in general, there is increasingly more centralization rather than decentralization in the overall process.

• Because in Western law, the Importer of Record and buyer (who puts it on the shelf) is liable for any safety issues, you need to pull samples yourself—don’t just trust a report or a factory rep to pull something for you. In general, when you test samples, Minor defects should not be more than 4%, Major no more than 2.5%, and Critical cannot exist (0%).

• Mr. Yuk stated that he was traveling last week with Allen Shaw, former head of the US CPSC. He says that there is a bill in congress now to change lead standards from 600ppm to 99ppm—that basically means everything is going to have to be 100% lead free. In addition, China now has it’s own shipping standards for toys and lead content. This has created a huge delay in the shipping of toys out of China (since last year’s recalls). Finally, there is a new US standard for standards violation: 3-strikes and you get criminal prosecution. There is some great information for vendors on the CPSC website.

• China’s new Labor Law is also showing some real teeth already too. In the first quarter of this year, more than a 1000 factories have been closed in Guangdong Province in alone.

• The US C-TPAT has also increased the number of random open-container inspections for ships coming from China into the US.

• And even with all that, it’s going to get even more complicated. The new standard bring promoted by some of the big box stores (Wal Mart, M&S)—is the carbon footprint. This will require suppliers/vendors to document their entire supply chain.

• But remember: QUALITY IS A KNOWN QUANTITY—IT CAN BE TESTED, IT IS ESTABLISHED BY GOVT STANDARDS, IT CAN BE KNOW AND IT CAN BE CONTROLED.  It’s all up to you.

Tags: Business by david
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More questions from the Global Sources Q&A sessions in Hong Kong this week.

How do you know in if you are working with a trading company and what value do they really provide?

1.    Your relationship with any middle man should work to get you the best possible quality product.  For example, as a production manager, If I ship to you and you don’t like it—I eat it.  It is in my financial best interest to ship you only approved/quality products.  This is an invaluable service that you will not get from a factory, a buyer or anyone else (other than you doing the local work yourself).

2.    Your trading company should tell you up front who they are, who pays them and what their relationships with the various factories are.  You should never have to wonder if you are working with a trading company if you thought you were working directly with a factory.

If you are paying for introductions only, it may be be of much value.  Unless, of course, you can’t come here yourself.

A couple of oft forgotten things that will affect your price in China.
1.    QC and testing will/should take about 3% of the price of the product.
2.    Shipping will average about 25% to 30% of landed costs (assumes sea, not air freight).

Some Common Issues with Chinese Factories, via BV.
1.    75% of Chinese factories have issues with correct wage payments and overtime payments.  This gets bigger each year as the international community gets more and more involved in the production process.
2.    15% of Chinese factories with child labor; usually 13-15 years old on “part time” work.  Relatively speaking, this is not as big a problem in China as is the unpaid overtime issue.

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More New Buyer Questions from the GS show in Hong Kong this last week.

Q.  What do we do about MOQ’s?  Do we tell the factory that we want 100K or 1K?

A.  Just like you, if you were told that your price changed just before you made a purchase, factories don’t like bait and switch.  If you really do want 100K but need to see 1K first, build that into your PO and negotiate with the factory to make the 100K piece order contingent on the quality of the first 1K.  But don’t ask for a bid on 100K and then order 1K and leave them hanging.  The factory most likely will not sell you 1K pieces at the 100K price anyway.

Q.  Do I need to speak Chinese to work here?  What if English is my second language too?

A.  Certainly not.  If you can it helps, just to listen in and find out more of what’s going on first hand.  But it’s not necessary, no.  If you don’t speak English well, and chances are your factory doesn’t either, then you need to just hire a translator.  If you are doing a lot of complicated mold work or if your product is very technical you’ll want to hire an industry expert rather than just a kid with a college degree in English.  You can always just “talk” with a calculator and calendar, but it will take much longer, leave you with a ton of questions and will be very difficult to confirm quality.  Typically, show buyers employing this method are shipping to third-world destinations were quality is not their first concern.

Q.  I can’t come back to China so how do I confirm that quality is achieved?

A.  Unless you hire someone to check it for you or you come back yourself, you will never be able to confirm the quality.  3PQ is relatively cheap, a few hundred a day, to give you at least the peace of mind that you got the product in the correct quality/quantities and in the container like you ordered.  Pro QC or a hundred other folks can do this for you.  Don’t chance it.

Q.  I’m thinking about managing my own shipping to save money, how problematic is the Chinese Customs for exporting?

A.  Very.  Why would you ever even consider this?!  Unless you’ve got enough quantity to have your own in-house shipping department (and yes, it’ll take more than one person to do all your tariff codes, paper work, logistic coordination and VAT refunds), I think that you’re nuts to do this yourself.  There are at least 10 if not 20 different people you have to coordinate with to ship any single shipment and with all the forms and info (in Chinese) you’ll never save time or money doing it yourself until, like I said, you’re big enough to have your own shipping department.

Finally, I had a very nice conversation at the “Ask the Experts” Q&A Sessions yesterday with a rather worried new buyer.  Basically he said:  “I’ve made samples and placed two trial orders already with 4 different factories.  I didn’t like the quality I got and I’m currently not working with any of them.   But now I’m worried that they may be violating my IP.”

My response: “Don’t worry, they are.  You’re best case scenario now is to hope that they don’t’ file for trademark or patent registrations in China before you do.”

Remember China is a file first country so you’d better be the one that files first!  That means file BEFORE you give your art to the factory.

Tags: Business by david
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Here is a question (and the answer, bonus!) from the GS show presentation that I thought would be valuable to anyone that is working in China.

“What do you do about late shipping?”

1.    Contract out dates and penalties before hand.  Certainly get your dates and penalties written down, but also (explicitly) review them with your supplier and get signed confirmation from a manager.
2.    Review and confirm the specifics again, with a qualified manager, at another time to ensure that those shipping dates and penalties are indeed agreed to by the factory. Do this more than once.
3.    Personally confirm production capacity and times for your product when you visit the factory and do the scheduling math yourself.  If you run the numbers and present them to the factory you will have a valuable discussion into the details of how they figure out production times.
4.    Make sure that you get a check list, from the factory, of dates and items that you and they need to hit to ship on time.  Keep those records up-to-date and copy every decision maker in the factory on the on-going history of those items.
5.    Physically confirm (on-site) the production check-points and quantities throughout the production process.  What happens when you miss a date or under produce?  Ask the very day you find out, not later on when it may be too late.
6.    When it starts to get close and your own numbers are telling you you may be late, bring the issue up as early as possible.  Take the initiative yourself to make things happen on time.  Don’t be worried about face—be polite, but certainly ask—remember, it’s your money, you should get the answers that you want/need.
7.    At the point that you know that your supplier will for sure be late, start negotiations immediately to fix the problem, speed up final production or begin compensation options, etc.  Talk only to people that can make decisions—don’t waste your time with sales people.
8.    If necessary, involve legal action earlier than later.  Don’t make empty threats, but don’t be afraid to get a lawyer to help you out either.  This assumes that your contracts and PO’s are executable in China and all your paperwork and business registration are legal and up to date.
9.    Understand that if your orders are small and if you let the production process go until the very end without checking on things yourself, you will almost certainly be left out in the cold.  Unless there is incentive ($) for the factory to serve you, they won’t do it.  If it doesn’t seem like it’s a priority for you it won’t be for them either.
10.    In your contracts, make shipping on-time an incentive for your supplier—be fair, be specific and make sure you’re not cutting the legs out from under your negotiations by making the penalties overly punitive.
11.    Worst-case scenario: get what you can, when you can and call it good.  To do this and not lose your shirt you have to plan ahead—and I would do this no matter what.  Give yourself a couple of extra weeks (without telling your supplier) to ship for the “just in case” that will almost certainly happen.  This means you get what you want, that’s the plus side.  It also means that you won’t be able to hold your supplier to tight dates on the next order since he knows you’re padding your schedule.
12.    Finally, things not to do.  Mike Bellamy of Passage Maker USA says that asking for your deposit back is like saying: “We’re done with you.  We’re moving on and we don’t even want the product you’ve already produced either.”  In other words, it’s a death nail in your relationship coffin.  At this point the factory has no incentive to work with you to resolve concerns.  Don’t play your biggest card up-front leaving you with no negotiation tools later on.

More goodies tomorrow!

Tags: Business by david
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