How Small Businesses can Successfully Source in China

Common Thinking

Many small-to-medium companies do not realize that they can experience tremendous savings by sourcing goods and components in China.  While others may be reluctant due to fear of the unknown, requirements for high volume container loads, losing money, quality problems, etc.  Successful sourcing is similar to any other business activity where self-education, experience, or a business advisor can lead to favorable results.

This article is intended to provide some basic direction for success.

Company Size

We’ve seen large US companies fail in China while small companies succeed.  Why?

Large firms are sometimes too slow to move and cannot overcome internal inertia.  Whereas we had one of our small clients with sales of 3 million dollars able to save over $300K/year with no capital investment, by sourcing only four machined items.  Shipments were all LCL (Less than Container Load).  Another firm placing orders as small as $2,500 was still able to see savings over 50% after paying applicable duty, ocean freight, inland freight, and broker fees.

Naturally there are constraints driven by volume and product mix.  For example, a mix of steel fabrications with steady demand is easier to source than the same mix having too many color variations that cannot be forecast in advance.  Products with little value added are not good candidates.  Examples are commodities produced by highly automated processes.

Take Away – If you are small, think BIG.

The Opportunity & Rewards

Successful reduction of standard cost can lead to re-capture of lost business, entry into newer markets, higher profits, bundling of options as “standard”, and funding of new products.  Occasionally there are pleasant surprises when a valid offshore quote is discussed with the incumbent supplier and the local domestic price is suddenly reduced.  In this instance, everyone wins because a moderate cost savings is gained and the local supplier keeps the business.

A small Midwestern firm was purchasing expensive kits of custom made stainless fabrications along with all necessary stainless threaded rods and fasteners.  The local cost per kit was $2,037 each @ 350 boxes per year and the quality was terrible.  In only three months, the kits were tooled up with a privately owned shop to make the same item for less than half the price and the quality was superior.

A mid-sized New England firm successfully sourced below their own supplier’s cost, providing them the opportunity to become their “supplier’s supplier”.

One supplier built custom life testing machines to perform endurance testing 24 hours per day for a new product.  The USA buyer lacked the resources and funding to do this in-house yet the China source was able to design, build and begin the testing the machines in a few weeks.

By having an understanding of China sourcing, coupled with reliable sources, one can even have product development work done offshore.  Suppliers often have all modern CAD software for handling design work.  A good supplier may be able to build/test prototypes faster and more economically.

Take Away – Experience has shown that even small firms can realize sourcing savings when executed properly.

The Risks

An entire article could be written on this subject alone; however, some important considerations are quality, loss of reputation and loss of money.  Non-conformances can lead to late shipments, rework, and expensive replacements/recalls not to mention safety and liability.

With proper planning and choice of suppliers, the risks are minimal.  For example, it’s much easier to build on a series of small successes and defer complicated projects.  One should avoid sourcing completed products where there is no documented record of performance parameters because it may lead to costly rejections driven by emotion instead of fact.

An entire assembly could be sourced at the component level at first until production is stable and later, one might carefully ease into sourcing the completely assembled product.  A rapid start with the completely assembled product could be a recipe for failure at the outset.

Take Away – The risks are minimal if one chooses the correct items and a match is made with the correct supplier.

The Obstacles

Often the major obstacles are found inside the buying company.  A partial list includes:

1. Outdated or low quality engineering documentation
2. Sending samples that do not conform to specifications
3. Poor communication from buyer to seller
4. Lack of resources
5. Lack of funding
6. Resistance to change
7. Bonus system metrics in conflict with offshore sourcing requirements.
8. Key individuals unwilling to travel to China.
9. “Not Invented Here”

Earlier in this article there was mention of a small Midwestern firm that saved 10% of sales with no capital investment.  The project was completed in less than six months because the firm had proper engineering documentation coupled with an open and aggressive desire to succeed.

Supplier obstacles can include:

1. Misleading and deceptive websites.
2. Poor communication from supplier to buyer
3. Supplier falsely claims to have capability to produce the product.
4. Supplier changing critical subcontractors without approval of buyer
5. ISO certified to systematically produce defective product according to inadequate procedures with no quality control.
6. Inspection reports that show conforming measurements for non-conforming features.
7. Non-conforming material
8. Supplier fails to inform buyer promptly of problems.
9. Employee turnover

Take Away – A careful self-examination should first be made regarding internal obstacles.  Then find the right supplier.

Using Offshore Traders & Exporters

Trading companies, exporters, and importers are all “middle-men” who handle details below.  This pathway is perhaps the simplest approach, with the least risk, to a small company just beginning to source in China.

1. Finding and managing all suppliers, small and large.
2. Handling all communication from buyer.
3. Translation of all documents from buyer.
4. Pays factory and receives funds from buyer.
5. Performs pre-shipment inspections at factory of supplier if necessary.
6. Coordinate all logistics including consolidation of cargo from multiple suppliers.

A qualified trading company adds significant value in exchange for a reasonable profit.  They will also bring the buyer to visit the suppliers.  Another benefit is they can pool small quantities from dissimilar factories into one shipment.  For example, if the buyer is looking for plastic injection molded parts, circuit boards, switches, and CNC machined die-castings, a good trading company can meet all of those requirements.  The benefit to the buyer is that of having only one vendor and one delivery.

It pays to shop around.  Many years ago we had two trading companies quote the same project.  Both traders were using the same factory but prices were vastly different.  Why?  Like any business, they had different overhead structures, different lifestyles, and different markups.  When selecting a trading company, its best if they have a core competency close the requirements of the buyer.  As an example, avoid a trading company that handles a diverse product mix such as circuit boards, kitchen wares, and exercise equipment.

Some trading companies claim to be manufacturers with “our own factories” despite the fact that some of these factories are tiny ill equipped and unqualified shops.  One local firm thought they were buying direct from China but investigation showed they were actually buying from a trading company who added no value.  The trading company was not geographically close to the supplier, had no staff, no office, no engineers, no inspection equipment, and spoke no English.  All English translation was handled by a student.  Process control flow charts were well done and nearly perfect according to auto industry standards, but had no relation to the factory itself which had dirt floors and was filled with oil-laden mist.

Take Away – Obtain multiple quotes and then visit the trading companies as well as all the shops that will actually make the product.

Buying Direct

Buying direct eliminates the trading company markup in exchange for handling the responsibilities.  The actual process of importing is not especially difficult or expensive, especially with some experienced help.  The real difficulty is with qualifying the supplier, knowing exactly their capability, planning inspections, how the money flows, etc.

One well known USA brand leader, attempted to launch a new product line with a Michigan based “supplier” they’d met a Las Vegas trade show.  When we visited the “supplier” in China we found they had no factory, certainly not the promised “modern assembly line” and no capability at all to manufacture the product.  In addition, none of their subcontractors were qualified to produce critical items.

During frequent flights to China, we often meet small business owners going to meet potential suppliers for the first time.

Take Away – Visit suppliers before engaging in any business.

US Based Importers

Importers here in the US will buy factory direct, from importers, or both, or sequentially via a series of markups.  The importer may have long term relationships with the suppliers and visit them regularly.  The opposite may hold true where the importer knows nothing about the supplier.

A large local firm with over $130 million in sales entrusted a new product line to an East Coast based importer who convinced Purchasing they have engineers visiting the suppliers on a regular basis to ensure quality.  When we visited their sources in Taiwan and China we learned they’d never met the importer and the importer had never seen the factories.

Another local firm was buying from a Los Angeles importer who was buying from an exporter who was buying from the factory.  At the same time, the local firm was splitting the volume by dual sourcing “factory direct” from China.  It turned out that the “factory direct” buy was actually from an unqualified trader.  We also discovered the entire dual sourced buy from both supply streams was actually all coming from the same factory.

Take Away – Make certain the importer is not switching suppliers after samples are approved.  Ask to visit the factories along with the importer.

Finding Suppliers

Far too many companies attempt to find suppliers via internet search engines as well as the well-known China sourcing bulletin boards.  Unfortunately, a large number of these advertisers claim to be manufacturers with their own factories but “let the buyer beware”.

Websites alone are inadequate to judge a supplier because they often misrepresent the factory, machines, and photos of successful production.  We’ve visited factories having impressive websites showing products they’ve never made, facilities they do not own, and they had absolutely no capability to produce the product shown.

Phone calls to prospective suppliers can have mixed results.  A poor command of English might be present for an outstanding supplier while excellent English may mask an unqualified supplier.  The street address might determine if it is a residence or a business.  Phone calls to the local China phone office will determine if the phone is a business or personal account.

Email addresses having company server names will have more credibility than public server addresses such as Hotmail.  Conversely, some of our best suppliers prefer to use Hotmail or a similar account.

A client from Italy met a supplier at a tradeshow in Zurich and we were asked to audit the factory.  In spite of the high quality website and catalog, along with framed ISO certifications, the factory had no capability to produce quality goods.  What we discovered was the supplier lacked the most basic of quality controls.

Referrals from other business associates are often a good source of leads.  Most of our reliable suppliers were not found via internet searches.  Leads from a face to face dialogue at trade shows can be the pathway to actual plant visits.

Plant visits are really the only way to determine supplier capability.  These visits alone may be insufficient because the visit does not really reflect the day to day activities.  You may also need to visit critical subcontract operations such as powder coat, plating, heat treatment, etc.  In addition, if the supplier is buying critical items such as circuit boards or die-castings from someone else, you should plan to visit these companies.

A trading company once told me they occasionally took the buyer to visit factories that were not even making the product.  It was all for show and the real factory was somewhere else, less impressive, and obviously cheaper.  The buyer returned happily to the states, placed orders with the trading company, and the trading company purchased from the cheaper source.

Take Away – The best way to learn about suppliers is to visit them before placing any business.

Our perspective on sourcing goods and components in China comes from decades of working with clients located throughout Europe, the US, and Asia.  Do you have any experiences, thoughts or questions that you would like to share on this topic?  I would welcome your feedback.

Steven Anderson is the President of Global Development Solutions Corporation (GDS) www.gdsconsulting.com.  To speak with Steve directly call (508) 835-5809 or by email at anderson@gdsconsulting.com.