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Seconds from Sourcing Disaster

In 5 words or less: Don’t be stupid.

Executive Summary:

Do your due diligence/audits on potential suppliers BEFORE you send money and make sure you check the quality before the goods ship out of China.

Full Article:

Would you buy a used car without taking it for a drive, even if the dealer was well known?

Would you buy a house without taking a tour first, even if the realtor was a famous agency?

Would you have major surgery without getting a second opinion, even if the doctor was from a prestigious hospital?

Would you place a 100,000 USD order with a supplier in China that you have never met in person, if they advertised on a popular website?

Most people answer “no” to the first three questions, yet when it comes to China sourcing, a shocking number of buyers expose themselves to significant risk because they put far too much trust in online directories and fail to do even a minimal amount of due diligence and quality control.

Perhaps it is because many buyers don’t know that auditing and quality assurance services are readily available and provided by 3rd parties at very reasonable prices.  Hundreds of USD is all that it costs to have a reputable company like www.AsiaQualityFocus.com visit a supplier to validate that they are a legitimate business with proper quality systems. www.cbiconsulting.com.cn can be hired to do a detailed financial and reputation audit as well. For that matter, flying yourself to China and spending a few days at the factory is a tiny investment, especially when you weight it against to the cost of a lost deposit, quality failure or missed delivery date.

 

Having lived in China for 12 years, I have witnessed wave after wave of foreign buyers falling into the same pitfalls as the previous generation to get off the flight to China. At the China Sourcing Information Center, we are asked almost daily to conduct triage and help buyers dig themselves out of messes with their suppliers.  9 out of 10 cases (including the drama in the following case study) could have been avoided had the buyer followed some simple AND affordable procedures known to the experienced buyer.

Have you ever watched the National Geographic channel program called “seconds from disaster?”  They take nightmare scenarios like plane crashes and shipwrecks and walk the viewer through the steps leading to an actual disaster.  In almost every episode, the victims had the chance to save themselves, but for whatever reason they missed the opportunity and were doomed by their poor choices.  Often the investigators and a few survivors are the only ones left to tell the story and put together the puzzle of what went wrong.  Let me walk you through the train wreck below as if I were an investigator taking notes from an eyewitness to the disaster.  The case study below is a true story sent to me by a friend who asked me to give my opinion in hopes that other buyers, including himself, could learn how not to make the mistakes made by the company below.

Witness: “Everything I am about to tell you we can back up absolutely with emails, photographs and videos.”

Investigator: “I have no reason to doubt you. Yours was not the first China Sourcing train to wreck on the rails out of PRC”
Witness: “I can tell you from firsthand experience the company has virtually no control over the crummy factories they contract with as it turns out. “

Investigator’s notes to self:

Clue #1: “as it turns out” indicates the buyer assumed the vendor was in control but later learned this was not the case.

Probable Mistake #1:  Failure to conduct due diligence or a quality audit. I suspect they took the web page and factory sales people at face value when the supplier said they were a professional and experienced company.

 

Cost to perform audit:  a few 100 USD to engage a 3rd party and validate legitimacy of supplier.

Witness: “Even though we went to China to approve the first production sample the entire first container of our product was totally defective.”

Investigator’s notes to self:

Sensing some discrepancies in the story. If the entire container was defective, then all parts pulled from the production run were defective, so it is not possible that first production samples were acceptable. I suspect that the buyer THOUGHT they were looking at production samples when in reality they may have approved “golden samples” or prototypes provided by the supplier to ensure the buyer had something good in their hands before placing the order.  Wise move for the buyer to come to China, sad move that they didn’t stick around to confirm that the “so called initial production samples” actually matched what was being produced on the line for their particular order.

Probably Mistake #2: Lack of pre-shipment inspection to confirm that order was to spec as it was being loading into container for shipping.

Cost to perform pre-containerization inspection:  a few 100 USD if engaging a 3rd party inspection agency
Witness: “The company admitted to the defective product but in the process forced us, under duress, to place another order (twice as large) as a condition to take back the first order. Sadly it was not until the second container had departed and the company had received full payment we were than informed the second production run was also defective. This time they had purchased sub-standard parts and did not have the required finish.”

Investigator’s notes to self:

Repeat of Mistake #2: Failure to conduct a pre-containerization inspection.

Additional Mistake #3:  Failure to link inspections with payments. The golden rule of China sourcing is to pay your supplier (full or at least partial payment) AFTER inspection has been made on your order.

Witness: “The company agreed to pay us to repair the defects which entailed taking every unit apart completely to replace the bad parts. They never paid for this work which we are now doing piecemeal to keep up with sales. They also “bought” hundreds of units from us two years ago but never paid for them. They are now attempting to coerce us once again to place yet another order to get the money they owe us which we are absolutely convinced will be defective.”

Investigator’s notes to self:

Train wreck imminent, yet passengers failed to jump off when the chance presented itself.

Witness: “To make matters worse while all this was going on we also had paid the company a huge deposit for tooling our commercial version of the product. The 10 production samples they sent us in time for a major show were worthless and broken. We found out later the supplier the company found was one they had never worked with in the past.”

Investigator’s notes to self:

Appears the buyer was dealing with a trading company rather than actual manufacturer. Trading company probably has a great marketing message and price, but no actual experience and little control over the manufacturer.  The blind leading the blind, resulting from Mistake #1: failure to research your suppliers and verify their ability.

Witness: “When asked why the company would send garbage knowing they were no good the answer was “to make the deadline.”

Investigator’s notes to self:

Ramification of Mistake #3- not linking payment to inspections.  Factory was incentivized to ship on time in order to get paid, rather than focused on “shipping products TO SPEC on time”.

Witness: “They owe us big money which they admit to in writing. Yet now in the latest email from the company representative she now states we never told them there were any problems until “months or years later.” We spent 3 days writing a reply to state agreed dates and specific emails to demonstrate this is a BIG lie.”

Investigator’s notes to self:

Missed Opportunity.  Buyer should have launched legal action (at least a demand letter). Instinct tells me the supplier knows they are wrong and is throwing every last ditch excuse in hopes of getting the buyer to spend even more money.  Or perhaps the factory is using the time to liquidate their assets in case a lawsuit does come down.  Scenario is reminiscent of the old “guess which cup the ball is under” scam.  The mark keeps paying round after round but never gets it right because the ball was removed from the cups when the victim wasn’t looking.  In this China sourcing case study, the buyer keeps putting good money after bad and the supplier may have no plans to actually ship quality product.

Witness: “I‘ll finish with one last example of the fraudulent nature of the company’s business practices. Our Netherlands distributor placed an order for 100 units which were shipped directly from the company. After the order was in transit we received an email from the company’s representative stating there was a problem and a tool was being made that would be required to repair each unit. She suggested we wait until the distributor took delivery before telling him we shipped him defective units. Needless to say we had similar issues caused by the company with all of our overseas distributors.”

Investigator:  “I can’t say I didn’t see that coming.”
Witness: “As I stated, all of this is well documented and we are now seeking to discover what recourse we have to get our money back. If all else fails I may choose to put together a book proposal for my literary agent who is based in NY, to circulate to publishers. A good title might be THE GREAT CHINA RIP-OFF.

Investigator:  “A book may help you vent your frustration, but it is not going to get your money back.  Assuming you have proper contracts and a clear payment trail to the vendor, don’t rule out legal action.  There are plenty of English speaking local lawyers based in China, and just like factory labor is lower than back home, luckily so are attorney fees.  But before you engage a legal team, I would suggest the following:

a)       Hire investigation firms like www.CBIconsulting.com.cn to find out if the company you want to sue actually has any assets lawyers can sink their teeth into.

b)       DON’T let your supplier know you are preparing a case.  This will most likely not scare them, but rather give them time to prepare and perhaps hide assets.

Believe it or not, the China legal system has come a long way, and foreigner can get a fair shake in the courts assuming you have signed contracts and well documented order details.”

Witness: “Yes, if you choose to investigate you will hear stories from the company’s representative that our product is no good and is too hard to manufacture. “

Investigator:  “Sounds like they have already started to prepare their defense.”

Witness: “Check out our website. Our product won an award and has been endorsed by industry pros. Ours is a great product that ended up in the hands of unethical amateurs not skilled in the manufacturing process and went for the cheap out of spec materials to make more money disregarding and interfering with our brand building process. “

Investigator’s notes to self:

Why would such a professional company let themselves do business in the first place with a sloppy supplier?  The answer to this question will expose the root cause of this sourcing train wreck. By selecting the wrong partners in the first place, the buyer began a sequence of events that was more likely than not to end in the project’s demise.

Summary of lessons from the case study:

1.       If you are going to use a trading company or broker rather than going factory direct, make sure they have excellent reputation and track record of success.

2.       Link payments to performance/ inspections.

3.       Do multiple inspections at various key phases of production.

4. Find the right supplier in the first place is the best way to avoid drama in the long run.

 

Wishing you successful China Sourcing!

Best Regards,

Mike Bellamy

Author, “The Essential Reference Guide to China Sourcing” (chinasourcinginfo.org/book/)



Mike Bellamy

Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center (www.ChinaSourcingInfo.org). Author of “The Essential Reference Guide to China Sourcing” and founder of PassageMaker Sourcing Solutions. Mike is co-founder of CSA, the China Sourcing Academy.


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