At each of the Global Sources New Buyers’ Training Programs and in my inbox probably once each week, I get a question something like this one I received last week:
“Hi, David, I found a few suppliers online that can do what I want but they all want me to wire cash directly. I’m sure that this isn’t the way to do this. What other options do I have? Also, what happens if I send them money and I don’t get my [product] or it shows up broken? How would you do it?”
To me, wiring cash (which really is the way that it’s done) is not the part that you should be most worried about. What you really need to do is figure out how to tie the quality of the goods to the payments that you will be wiring. And also how to confirm that quality before you take delivery of any product.
If I was working by myself from over seas this is what I would do.
LEGAL NOTE: If you are going to be doing any type of OEM/ODM work and not just buying stock items then you need to take all the legal precautions you can in BOTH your home country and in China. If you do not protect your name/brand (both in English and Chinese) and your product designs here, you probably will not have the protection in China that you’ll want/need later on.
First, I’d get prices from 3-4 factories on as many pieces as each one will bid out for you. I’d tell them up-front that you’re talking with other factories and comparing prices but that you’re looking for a single long-term supplier. I’d be very honest about the qtty’s and the quality expectations. If you exaggerate the qtty’s they will cut your quality to compensate for the lower bulk prices they’ve quoted you.
Second, I’d be very up front about price questions and get as many details as possible. You have to be sure to not only get a list of what is included in the price but also what is NOT included in the prices. Negotiate the prices like there is no tomorrow—the prices you’ve been given are purposefully high. They expect you to negotiate. Don’t ever except the first price you’re given. Don’t offer or even think about paying a supplier their higher price in return for “better quality” unless you specify exactly what better quality includes.
SIDE NOTE: Price terms and shipping terms are not the same. FOB and COD on the bid and Pro-forma Invoice are not talking about the same items. Finance terms are simply when and how you pay for your goods. Shipping terms designate a specific logistical service that is (or is not included) in your final payment prices. Having FOB or CIF shipping terms listed on the contract does not tell you when you must pay. Similarly, COD does not tell you what portion of the international shipping costs you are personally responsible for.
Third, before I ordered, I’d pay $50 (per supplier) and have a 3rd party verify the company info. Look up import records (public in the US), talk to any of the suppliers’ clients if you can and talk with others in the industry and see if your potential supplier has any type of reputation. Glo-bis, Verify. If you’re doing a) custom work with lots of tooling, b) a single order that is a significant dollar amount, or c) will be doing regular orders that are hundreds of thousands of dollars over the course of months/a year, then I would suggest that you pay to have a standard capacity audit done. This will cost you somewhere in the neighborhood of $650 plus expenses.
Fourth, you need to confirm with your home county what both the import requirements and product requirements are. If you need to meet specific product safety or health standards then you MUST PAY FOR A THIRD PARTY TO TEST BOTH THE MATIERALS AND THE PRODUCT BEFORE YOU SHIP IT. This isn’t an optional step. This can’t be left to the factory. If you are the importer of record then it’s YOUR responsibility to confirm that the materials and the product meet your countries standards. The factory really has very little incentive to do this for you if you’re already committed to an order.
The import requirements are different from the product requirements. To know what is allowed and how much it will cost you’ll need to contact a freight forwarder with offices in both your home country and China so they give you a full list of all the duties and requirements. There are often not just import requirements into your home country but export requirements that must be met to get goods out of China too. Make sure you know BOTH before you order.
SIDE NOTE: Testing. You need to have an independent third party test your raw materials, your molds, and certainly both inline and finished production. I’ve used Intertec, BV and Pro QC. They all have labs in China (and other countries). They will send someone out to pick up the samples, if you request—and I strongly suggest that you do this. If you are not here yourself to pull the samples and you don’t have a 3rd party do it for you, what incentive does the factory have to send samples that may not pass the test? None. Do it right or your just wasting time and money.
Fifth, negotiate the prices again, and order initial samples from some (2-3) of your potential suppliers to check the quality and the security and service of each one. Getting your order and finding out that 33% is bad (everything from one supplier) is much better than getting the order and finding out that you picked the wrong guy and 100% is bad.
Sixth, I’d wire (T/T) the money to them directly if the cost was less then $1000. If you split up the sample order into 3-4 parts, you’re less likely to lose the entire amount and you’ll learn how responsive/responsible each of them are too. For small orders there is really no other way to do it either. No one in China has heard about Paypal or escrow accounts so don’t waste your time. And no one wants to do LC’s for less than hundreds of thousands of dollars, and even then it’s tough to get one. If you’ve done your DD and paid for research then you should be relatively safe. But, of course, at some point you need to trust people. You should verify as much as possible before you trust, but you will still have to trust at some point—which brings me to the next point.
Seventh, I’d tell each of the suppliers that product cannot leave the factory until it’s been QC’d by a third party (orders for sure, samples too, if they are expensive). And then copy your 3PQC on the TT and the invoice and the contract (that is, of course, signed/stamped by you and the factory). This will help to make sure that the factory knows that someone who is already in China will be coming out to check the product and can/will provide a paper trail of all important documents and correspondence.
Eighth, have your 3PQC do at least two/three visits. They should check production (inline) and final product and loading of the container—this is the bare minimum. You should do much more QC and testing especially if you are in a sensitive industry that requires specific health and/or safety standards. The quality rule for product from China is very simple—the more time you spend monitoring the quality of production, the better the finished product will be. Spending $2,000 for QC and testing for a order even as small as $10,000 is better than spending $10,000 and 6 months on product that shows up below standard or wrong or broken.
SIDE NOTE: Returns. Getting bad product back into China is expensive, time consuming and almost impossible to do. China has strict laws about sub-standard product coming back in to China (why would they want it?!) and getting your supplier to pay for it will never happen. If you aren’t planning on coming to China and you aren’t planning on have 3PQ check on it, you’re really telling your supplier that shipping garbage is OK—and that’s most likely what you’ll get. Factories know that if they can get it on the boat, they’ll never see it again. And if you’re paying before it ships then you have no recourse—what incentive do they have to give you the best, most expensive quality? None.
Ninth, I would NOT continue to buy from all 4 suppliers after the initial sample, try to consolidate orders with one or two. But keep in touch with the other two and place small partial orders with them as the opportunity arises, just to keep them aware of you and your business and to keep you aware of their new products/options. It never hurts to have a back up ready to go just in case.
Tenth, I’d then plan a trip out here sometime in the next year or so—especially if you are going to order regularly. Visit each of the 4 factories. Time the visits so you can place an order or two while you’re here and see some of the production of your product. Maybe time it so you can attend some tradeshow(s) while you’re here too.
Finally, I’d contact a number of freight forwarders that have their own offices in your home state and the region your suppliers are in (for example: Guangzhou or Shenzhen for southern China; Hong Kong is sometimes not “local” enough) and get them to quote you complete shipping costs for both sea and air with all duties and fees included for each order. People are often surprised to realize that there are specific requirements and oftentimes duties and licenses necessary to get product out of China as well as to get product into another country. Sometimes these expenses can double the final cost of your goods. Negotiate rates with them based on your projected volume over the next 3-6 months. Like the factories, choose one forwarder all your orders (unless you also have to have UPS overnight something to you) and stick with them. As you push more and more volume through them, they will get better and better at anticipating your needs and more and more willing to help you with details and requirements. Schenker, Phoenix, Expeditors, Marsk are all forwarders that we’ve used.