Thanks to the sickly global economy and the resulting corporate deleveraging and pressures to reduce costs, many companies have increasingly turned to locating new sourcing opportunities overseas. The decision to either outsource production or seek new suppliers is a strategic one. But very often it is not given the strategic importance that it requires. Before anyone begins to outsource, they should have a clear outsourcing strategy. We have often been asked by clients whether we had any good advice as to how they should effectively implement a sourcing strategy. What follows is a brief guide that outlines a process we employ and that we encourage our clients to follow when seeking new manufacturing sources for their products. It is not all encompassing and is not intended to be a failsafe recipe for effective sourcing. The key, as with most initiatives, is in the implementation. However, it will provide a basic process that, when followed, will significantly improve your chances of having a successful sourcing experience.

1. Getting Started:
Sertus' Guide to Effective Sourcing
A China Perspective
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2. Getting Started: Sertus’ Guide to Effective Sourcing
A China Perspective
Thanks to the sickly global economy and the resulting corporate deleveraging and
pressures to reduce costs, many companies have increasingly turned to locating new
sourcing opportunities overseas. The decision to either outsource production or seek new
suppliers is a strategic one. But very often it is not given the strategic importance that it
requires. Before anyone begins to outsource, they should have a clear outsourcing
strategy.
We have often been asked by clients whether we had any good advice as to how they
should effectively implement a sourcing strategy. What follows is a brief guide that outlines
a process we employ and that we encourage our clients to follow when seeking new
manufacturing sources for their products. It is not all encompassing and is not intended to
be a failsafe recipe for effective sourcing. The key, as with most initiatives, is in the
implementation. However, it will provide a basic process that, when followed, will
significantly improve your chances of having a successful sourcing experience.
About US
Sertus is a leading provider of value-added procurement and logistics services. We offer our partners product,
inventory management, logistics and custom-made solutions to meet real client needs. With bridges to thousands of
factories, Sertus is able to help our partners build profitable brands by sourcing the best products while minimizing
costs. We also offer our partners access to certain well known, international brands that are part of the Sertus portfolio.
Our offices in the US, Canada, China, and Latin America work together to find the best sourcing alternative for all of the
critical components and processes in the supply chain. Sertus backs its geographic scope with a full range of services
including: product design, product development, procurement management, purchasing management, manufacturing
control, forwarder consolidation, shipping control, customs clearance, local forwarding consolidation and so much
more. Unlike most trading companies that intermediate a buyer and a manufacturer, Sertus provides comprehensive
turnkey services that cover every need of sourcing.
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3. Define and Understand Your Needs
Before attempting to source anything, it is essential that you have spent some
time thinking through your needs. It can mean the difference between
success and failure.
Needs form the raw materials from which we build sourcing goals, which in
turn make up the yardstick by which we measure the attractiveness of the
offers we receive. It is the ability of the supplier to deliver against his proposal
and your needs that will determine success or failure. Therefore, it is critically
important. Without a clear understanding of needs, the probability is heavily
skewed toward a process that runs its course along the path of least
resistance. As Elbert Hubbard said, it is the path of least resistance that
makes rivers run crooked. Worse yet, a miscalculation of needs runs the river
in the wrong direction! So take the time up front to understand as much as
possible about your needs to put yourself in the best position to reach a
successful conclusion to your sourcing initiative(s).
The purpose of a needs assessment is to answer the questions: who, what,
why, when and how.
1. Who is your customer? Perform an environmental scan. Think about the
context into which you will be selling your product. Conduct a target
population analysis to learn as much as possible about those people who will
be using your product. What do they have in common? What is the problem
the customer looks to solve with your product? Who is your competition and
what do they offer your customer that’s unique or different.
2. What is it that I want to source? Based on real customer needs and your
unique selling proposition, what is it specifically that I need? Conduct a
“needs versus wants” analysis to understand the critical elements that are
essential to being able to deliver your unique selling proposition. Identify the
specific differentiators between your product and those offered by your competition.
3. Why am I looking to source this product from overseas? Try to tie the response to a specific business need and be sure
that the perceived benefits you seek in sourcing the product offshore will be greater than the implied costs of alternatives
(whether that alternative is the same product sourced locally or whether the
alternative is to not source it at all). Be sure to contemplate both real and
potentially hidden costs in your analysis.
4. When do I need the product? Identify the specific inventory requirements that
will be needed to meet sales projections and determine when you will need
goods to be delivered to your facilities or designated destination.
5. How should my sourcing request be managed? Set a timeline and critical
milestones and try and stick to your schedule. Conduct a task analysis to
understand the best way to manage your request for proposals, review of
quotes, receipt of samples, selection criteria, etc.
Not all five questions must be answered as part of a needs assessment process.
But this list gives you a good example of where to begin. If you are able to
define clearly the answers to these five questions, then you should be in a good
position to communicate your needs to your potential suppliers.
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4. Define Your Priorities
When people are asked to define their priorities as it relates to their
sourcing initiative, we usually hear – “We want the best possible
quality for the best possible price and we need it delivered yesterday.”
This is not a prioritization, but a wish list. Unfortunately, when
everything is a priority, nothing is a priority!
There is a great story that illustrates this point well. A man, while
driving his regular route to work, noticed a car sitting at the far end of a
driveway, with its nose edging out ever so slightly onto the street. The
first day he passed, he did so with caution as he assumed someone
was trying to see whether it was safe to pull out. But as he drove past he noticed that the car was empty. For several
days he noticed the car in the same position, still empty.
One day, as he passed, he happened to look at the car just as he went
by, and noticed a FOR SALE sign taped just below the front grill. The
sign was hardly visible to anyone driving by unless they made an effort
to look at the vehicle closely, taking their eyes off the road, just as they
passed in front of the parked car. Why would they put the sign there?
The answer was simply that they had only one sign, and they wanted
to advertise to people traveling both directions, so they compromised
and put it on the front of the car. What they evidently did not consider
was that in reaching this compromise, they made it so the sign could
not been seen by anyone at all. Both directions were a priority, so
neither direction was a priority.
There are many methodologies to defining and organizing priorities. It is a matter of personal preference, but the end
result is the same. The methodology below is one we prefer because of its simplicity.
Must Have / Should Have / Nice to Have
Must Have: These are the absolutely critical specifications, criteria or other goals that MUST be included with any offer
you receive. You will define your ultimate success based on the content you write down here. Make sure to prioritize
within this category from most important to least important within the category.
Should Have: These would include all goals that should be achieved (but not essential) to determine whether the effort
was successful or not. Prioritize the “Should Haves” as well if possible. These will help you differentiate between one
offer and another in the event two solutions meet on an equal basis all Must Have priorities.
Nice to Have: Anything else that you would like to see included but clearly not going to define whether you were
successful or not nor will they be used to sway your decision from one supplier to another except as a tiebreaker.
Remember that priorities may change. It can be helpful to note why a priority is rated high or low, especially if we know
that there are temporary influences at work that will change in the future. You may have a short lead time of less than
30 days because you are out of inventory, but are aware that with proper planning this can be addressed going
forward. Hence short lead time will be less of a priority in the future.
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5. Determine the Optimal Location of Production
Now that you have defined clearly your needs and priorities, it is time to figure out
where the optimal location of production will be for your product. Typically,
products associated with high labor costs and/or that are purchased in large
quantities make the best products to source from China or any other low wage
country. Low run or one-off items do not lend themselves well to Chinese
manufacturing. Products where short lead times are required are also usually not
well suited for international sourcing due to freight considerations (note:
production times themselves can also be longer in China due to a wide array of
factors including energy shortages, working capital constraints, efficiency
differences, etc.). There are exceptions to this rule, especially for items that can
be shipped via airfreight while maintaining sufficient profitability.
China’s Low (But Rising) Wages
Although wage and benefit increases of 15 to 20 percent per year have been rapidly eroding the Chinese labor-cost advantage,
China continues to be the manufacturer of the world. It is true that the productivity gains realized in China (while significant
compared to other countries) are well below the labor cost increases seen recently and therefore competitiveness will wane as
we move into the next decade, ceteris paribus. However, cost advantages in our opinion are more greatly threatened by other
expenses, including: electricity costs, bunker fuel costs and related freight expense, land/rent, supply chain risks and the
expenses needed to control these appropriately. But even in light of these challenges, there are strong reasons to believe China
will remain a manufacturing powerhouse with significant cost advantages.
For one, China holds several material comparative advantages over other low-wage countries in the region (e.g. Cambodia,
Vietnam, Indonesia, and Thailand) , including: the largest labor force in the world, superior talent pool, better infrastructure, more
developed supply networks and higher worker productivity. While labor rates are lower in these alternative markets, the Chinese
advantages listed above mitigate most if not all of the savings from lower wages (not to mention that wages are rising very
quickly in these other Asian countries as well).
But possibly most important, China continues to be an export led economy. What does this mean? Simply put, China will not
cease from utilizing every tool in its tool bag, including financial and fiscal incentives, to support its export sector. Outright
government subsidies and direct manipulation in the fx market to maintain the reminbi artificially weak will continue and China will
remain a competitive alternative for your manufacturing needs (especially those that have a high labor component) for some time
to come.
The Critical Decision
If China continues to be the low cost alternative, then what are the determining factors that will shape your sourcing strategy as it
relates to location of production? Review your priorities and weigh these against the benefits and challenges highlighted above.
Is a short lead time a priority? Is it more important than low cost? If so, then you may want to consider near-shore alternatives
(like Mexico to serve North America or Central/Eastern Europe to serve Western Europe). Try and build a shortlist based on your
priorities and what you can learn about the manufacturing base in those countries. Are you searching for low cost apparel or
shoes? Then maybe you want to look in Thailand, Indonesia or Vietnam. But if you are located in Western Europe and are
concerned with a quick lead time due to fashion’s fickle trend shifts, then perhaps Turkey is a better option.
It may be difficult to determine the ideal location of production without knowing how
suppliers in that location will address your other priorities (e.g. cost, adherence to
critical specifications, etc.) or what in fact the production lead time will be (as this
can vary not only from market to market but also from supplier to supplier within the
same market). Therefore, make an effort to eliminate locations that will simply not
work. If you know you need your product in 30 days, China is not going to work for
you (unless you can afford to airfreight your product – and even then you are
looking at an exceptionally quick production turnaround).
This process involves research. It can take time and doesn’t need to be perfect.
But it will save you a lot of time later on (far more than what you invest at this
stage) if you can narrow down your search.
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6. Prepare Your Request for Quote (RFQ)
You have now assessed your needs, you have defined your priorities,
and you have explored location of production benefits and limitations.
At this point it is time to prepare your request for quote. To start, gather
all of the information that you will include in your RFQ and that you will
want to share with prospective suppliers (see note below on intellectual
property): product photos, critical specifications, packaging
requirements, branding, color schemes, certifications, delivery terms,
required lead times, required payment terms, product liability insurance
requirements, customs requirements, special markings, etc. If you
have a spec (or data) sheet for the product, you can attach this to the RFQ. The same would hold true for a bill of
materials as well.
We strongly suggest building a template that you will use for all RFQs. The benefits of a template are numerous, but
mostly it will standardize this stage of the sourcing process, helping you to ensure that your requests are
comprehensive and consistent. You are going to need to check back all quotes received against your RFQ, making it
easier if the relevant information is noted in the same place on all requests.
Quantities will obviously affect the pricing you receive. Therefore, it is imperative that you provide the prospective
suppliers with your anticipated purchase quantities. We favor breaking this down as a first order quantity and ongoing
order quantities (this could be expressed as weekly, monthly, quarterly, or annual volumes, depending on the
frequency of your anticipated orders). Make sure to request that the supplier also offer you their minimum order
quantities (MOQs).
We highly recommend that you also specify a timeline – when you need the quotes returned and when you will be
determining the winning bid. You may also wish to share your priorities with your prospective suppliers as well – i.e.
how you will evaluate the quotes you receive.
Finally, include a list of contacts that will be available to clarify any questions regarding the RFQ. It is not uncommon to
have separate contacts for specific disciplines; for example, one contact for technical questions and another for
marketing questions. Your supplier should know how to respond and to whom they should send their final quote.
For additional information, please refer to our white paper, How to Structure an Effective Request For Quote.
A note on intellectual property rights (IPR) in China: Even though China has
strengthened its legal framework and IPR laws and regulations as required by its
entry into the WTO, it continues to be a haven for pirates and counterfeiters. It
still boasts one of the highest piracy rates in the world. If it sells well, it is likely
to be illegally copied. While China is a party to international agreements to
protect intellectual property (including WIPO, Bern Convention, Paris
Convention, among others), companies must still register its patents and
trademarks with the appropriate Chinese agencies and authorities for those
rights to be enforceable in China. Copyrights do not need to be registered but
registration may be helpful in enforcement actions. As a result, if you are looking
to manufacture a new, innovative or unique product in China and are concerned
about piracy, then we highly suggest you seek professional assistance before
sending out your RFQs to a bunch of factories (sight unseen). There are plenty
of companies, Sertus included, that can help you to manage your RFQ process,
while protecting your rights by putting you in a legally sound position before you
share your intellectual property as part of the sourcing process.
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7. Identify and Shortlist Potential Suppliers
You are now ready to distribute your RFQ but don’t know where to send it.
You have researched the attractiveness of certain locations of production
(or at least have discarded some alternatives), but you are not sure, within
the markets you have identified, who to contact.
Factory Direct or Trading Company
The next critical decision you need to make is whether you want to go
factory direct or whether you will be using an agent or trading company to
help you. There are pro’s and con’s to each approach.
A good agent, in simplest terms, needs to be adding value to your supply
chain for it to make sense. Clearly, anyone getting in the middle of your
trade will be charging you for the work that they do. They key is to make
sure that you are getting good value for what you are giving up (i.e. the fees they will charge are really worth the services
they provide).
There are some cases where a local agent will actually be in a better position to obtain more competitive pricing than you
will get by going direct. Some Chinese factories prefer to deal with a local, someone that they know and have developed
a long-standing relationship with (referred to as guanxi in Chinese), than to sell to an overseas buyer. Furthermore, there
are many highly qualified Chinese factories that are not set up with an export license and therefore will need to liquidate
the transaction in local currency. A trading company or agent is in the best position to handle this for you.
Some trading companies also have certain product expertise and may have scale economies that they can pass along to
you such that your price is either improved or at least the same as it would be if you go direct, yet you have the additional
assurances and value being provided by your agent.
Complexity is possibly the best reason to use an agent or trading company. If you will need to source a number of
products from different manufacturers (such as components that need to be assembled, packaged, etc. or individual items
that will conform an entire line) then you are better off using a trading company with packaging and assembly capabilities.
Similarly, when working with multiple factories, you may need someone to oversee all production schedules to ensure that
everything arrives on time, are checked against your quality assurance standards, and consolidated per your instructions.
In this instance, a good trading company that has been pre-qualified by you is probably your best option.
Many of our largest clients are big box retailers who have significant operations in China. However, given the complexity
of their business and the lines that we manage for them, they prefer to use a single independent entity to handle all
purchasing, quality assurance / control, assembly and packaging, such that their private labels are branded consistently
across the line. Walmart and Target are good examples of these types of clients. The ease of dealing with one account
representative that can handle everything, when the purchases are complex in nature, is a very strong argument for using
an agent when sourcing from China.
A good agent can be invaluable, but finding the right partner can be a challenge. There are hundreds of small trading
companies that are set up to literally intermediate a transaction but add very little (if any) value. We refer to these entities
as “middlemen.” They operate with a severely limited or no infrastructure; and add hardly any value to your transactions,
acting as a matchmaker but with a nice margin built into the trade.
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8. Therefore, when looking for an agent, it is very important to find a reputable company that has a good infrastructure, deep
local relationships, and sound market knowledge. Your best bet is to find one that is a US or European based company
with wholly owned Chinese operations that are managed by Westerners and staffed with locals. This addresses the
concerns of having someone with local expertise, but provides the comforts of dealing with an entity that is incorporated in
a developed market, speaks your language (and can bridge communication seamlessly), and offers greater legal protection
to you as a buyer.
If you are looking to put together a simple, single item order that can be sourced from one factory and you plan on ordering
full container load (FCL) quantities, we almost always recommend that our clients go direct. Many of these customer types
have hired us to help source a reliable factory and to oversee production to ensure on-time delivery and quality control.
Our services are billed out as they are used (or bundled for repeat orders/transactions, offering volume discounts for these
clients), which has given birth to a “middle ground” that can be used by buyers when sourcing from abroad.
The middle ground, which is often overlooked, is to utilize a local partner to help you “manage” your factory direct orders.
Here, your local partner is not taking any proprietary position in the product you are buying (as we do in our trading
business), but rather charging you strictly for the services you need. Many of our clients are moving toward this model and
have found they are able to capture many of the benefits of going direct to manufacturers (i.e. establishing a direct
relationship and clear lines of communication with the maker), while being able to benefit from the value added by a local,
on-the-ground independent partner that will act as their eyes and ears. For almost all our Agency Services customers, we
have been able to add value to numerous points along the supply chain, whether this be in improving negotiated terms and
conditions, or assisting with production management, quality assurance training and protocol implementation, quality
control inspections, offshore inventory management or assistance in other production or logistics areas. These are
extremely valuable services that should be considered when looking to source from China or anywhere else off-shore for
that matter.
How to Find Manufacturers
China has thousands of factories that are churning out the world’s products every day. The hard part really isn’t finding a
factory – it’s finding the right factory for what you need. The most common way (and certainly the easiest) is to tap the
internet. There are a number of sites and directories that you can use, including the three largest: Global Sources
(www.globalsources.com), Alibaba (www.alibaba.com) and Made-in-China (www.made-in-china.com). While you will most
certainly find a number of supplier alternatives on these sites, you have not solved the problem of qualifying these entities.
Many may not even be manufacturers at all or worse yet, might be looking to swindle you out of your money.
How can you verify whether a supplier is indeed real, is a true manufacturer, and is a good fit with your needs? There are a
number of companies that you can hire to perform a background check on the factory. Yet just because some third party
has “verified” a supplier, does not mean it is truly a good fit and there is no guarantee for the accuracy of the information
you are provided.
You may also check with your local government. For example, the U.S.
government will help US businesses in verifying Chinese company information.
This can be done on-line (http://export.gov/china/services/index.asp) or you can
contact the Commercial Service Dept. at the US Embassy in Beijing. However,
the depth and breadth of information you will receive is not really enough to allow
you to move forward with confidence. It is certainly better than nothing and a good
place to start. But to get relevant and detailed information that pertains to your
particular needs, you are best served by finding a company that can perform a
factory evaluation for you, but that you intend to keep involved in the process. A
company that manages transactional exchanges, selling one-off background
checks, is less likely to work with you to understand all of your needs and perform
a relevant and comprehensive evaluation than is a company that will be involved
in helping you manage the order from start to finish (or some form of involvement
along the chain).
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9. Qualify Bids
You have shortlisted your suppliers, sent out your
RFQs and are now beginning to receive quotes
from the various entities that you contacted. The
first thing you should be doing as you begin to
receive the bids is to check them against your
RFQ to make sure all specifications, priorities,
etc. have been addressed and are quoted
accurately. Make sure the quotes are clear and
that any ambiguity is resolved before you
compare and contrast the bids received.
Create a scorecard that you can use to record all quotes as you receive them. You may wish to assign a
rating to each category (as defined by the priorities that you defined previously) and grade each supplier’s
quote on a scale of 1 to 5 in each of the categories on the scorecard. Scores can be weighted depending
on the importance of each priority and the totals can be compared in order to get a general idea of where
each offer ranks.
Unfortunately, selection of a supplier is not a
scientific process. Therefore, you need to have a
good qualitative understanding of the pros and cons
of each offer as you make your comparisons.
Once you have narrowed your list, you should ask
each of the candidates to provide you with a sample
for review. This is extremely important as it will allow
you to verify the spec noted in the quote sheet.
There have been far too many times where a price
that was too good to be true in actuality turned out to
be for a product that was entirely different than the
spec noted in the quote sheet. In the words of
Ronald Reagan, “Trust but Verify.”
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10. Meet Your Finalists
Business in many cultures (China especially) is not
transactional as it is in many Western cultures. It is
relationship based. Once you have selected your
finalists you need to meet them face-to-face. If you are
going to use an agent, a face-to-face meeting is also
recommended (and this is another reason why trading
companies that are incorporated close to home can
save you a long trip out of the gate).
One of the most effective ways of meeting suppliers is
to schedule a trip to a trade show where you can meet
several factories all in a single location. This will save you time and significant expense.
Find out from the suppliers you have selected as your finalists what shows they will attend and you may get lucky
and be able to meet the majority at the same show. Make sure to contact all of your finalists attending a show
beforehand and set up appointments with them for private meetings as well as scheduling a factory tour (especially if
they are somewhat close to the event locale). Check to see who will be attending the show from the factory. It is
very important that you develop relationships with not only the sales staff (who are most likely the people who have
been in contact with you thus far) but also with plant managers and ultimately the owners.
If you do attend a show, do not expect to do much more than meet some of the staff and see a good cross section of
the product they are selling. Most new and innovative product is not displayed at trade shows (especially in China
where there is a high level of paranoia, and for good reason, that innovation will be stolen if showcased).
Furthermore, many of the people who are manning the booths are often temps or hired help for the show and have
limited knowledge of the product. Don’t rely on promises or pricing offered at shows either as they are often thrown
out as bait to generate as much traffic or leads as
possible. The true pricing will be negotiated later.
If you are thinking about using a trading company or agent
in some capacity to help you with your purchases, it is a
good idea to get them involved in the process as early as
possible. One of the services we offer to our prospects
and clients is to walk shows with them and help not only
with translations, but also with setting up appointments
with qualified factories, organizing and scheduling booth
visits, and offering technical and product specific help as
needed to facilitate the sourcing process.
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11. Negotiate Price / Terms
At this point your initial shortlist has been
narrowed to your finalists, you have hopefully
met most of your prospects and you have
possibly eliminated a few. The list is now
significantly smaller than it was when you
started. You should have a good feel for the
capabilities of each of the factories you have
visited. Now is the time to begin your pricing
and terms negotiations. You should have a good idea as to where the market is and therefore you
may have a strong preference for one particular factory based on price and for another based on some
of your other priorities. Ideally, you might be able to get the more expensive factory down to a point
where it would make your decision an easier one.
All factories will negotiate to some level. But asking for huge concessions will usually not work. Be
realistic in your negotiations and understand you are developing a relationship that is one that needs
to be nurtured.
Negotiating terms can be difficult as many factories simply do not have the capital to be offering new
clients financing or eliminating down payment requirements. This is where a trading company or
agent can help. Effective intermediaries have existing relationships with these suppliers or at a
minimum are in a better position to help build guanxi and negotiate more favorable financing terms.
Factories selling to a local are more apt to offer concessions when it comes to down payments or
financing than when selling to a foreigner.
Negotiations with several factories is wise as
we highly recommend having at least one
back up supplier for your products in the
event something happens to your preferred
supplier. We often manage orders at
multiple factories for the products we
manage for exactly this reason – we want to
maintain relationships with several factories
for a given product. This is especially true if
the factories operate in different regions. It is
simply a risk diversification strategy that we
employ often.
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12. Define Production and
QC Strategy
Your pricing and terms negotiated, an
important question you need to consider is:
“How am I going to ensure that my products
are produced according to the lead times
offered by the factory and how will I ensure that what they deliver is going to be as per my order?”
The answer to the question will depend to a large degree on the nature of the product and the type of factory
you selected. However, you want to make sure that spec is adhered to and that lead times are met. From a
distance, it is highly difficult to manage. This is where a local agent can add significant value in helping to
monitor production, providing you with regular updates, in-line inspections, final inspections and production
samples selected at random from the final production lot for you to review before shipping.
Most critical during this stage is to thoroughly understand the production process of your supplier (this does
not need to be at a highly technical level, but you should understand the critical stages in production and the
time for each). Define key milestones that you want to monitor. If raw materials and the quality being used is
important, then you should possibly schedule an inspection of raw materials for your initial orders to make
sure that the quality is as you require. In short, you need to develop a production management strategy that
can be agreed in principle with the manufacturer prior to entering into a contract.
There are many companies that have experience in quality control and production management. But what
you often find is that these companies will only do what you ask of them. The QC protocols they set up are
based strictly on what you ask them to review. Therefore, if you happened to not mention that you would like
all of your master cartons closed before the goods are loaded onto the container, they simply will not check for
this (nor tell you – we have seen this first hand). More importantly, when problems arise, the usual response
is to highlight the exception but offer no
resolution. Therefore, you are left trying to
manage a crisis directly with the factory from
thousands of miles away. Understanding the
root cause of the problem, implementing
containing actions, defining with the factory
and overseeing the corrective actions as well
as working through preventative actions to
keep the problem from reoccurring are what
high value added agents will offer you.
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13. Place Order(s) / Contract
You have your price, negotiated terms, and
have defined a production management and
quality control strategy and are now ready to
place your order. It is critical that all of the key
specifications and terms negotiated are clearly
documents in your purchase order. You
should have everything issued in the local
language and under local laws. Therefore, if
placing the order with a Chinese factory, make
sure your contract is written in Chinese and
has been run by Chinese council (unless you
are placing orders via a US trading company with local operations in the country where your order will
be manufactured). In some countries, having the contract in local language and under local law is not
as critical. However, it is highly recommended and in certain countries (like China) it is essential.
You contract should be clear and concise. If you can arrange for penalties to be imposed for late
delivery, it is also recommended that you try and include this. However, many factories in China will not
agree to such terms. It is also an unfortunate fact that those that do agree are usually the ones that
are always on time – they don’t have any problem agreeing to these terms because they know they are
run efficiently and will meet the timeline you have laid out. It is the ones that won’t agree that we
usually need to worry about.
For contracts signed in China, make sure they are “chopped” by the factory. A “chop” is a stamp/seal
that is placed onto the contract. All legally registered companies in China are required to have at least
a company official chop. The company chop is required on all official documents such as contracts,
memos, bank account applications and labor
contracts. Technically, anyone who is in
possession of the company chop can legally bind
the company and therefore the management of
this chop is extra important.
The local Public Security Bureau (PSB) will issue
the company official chop upon successful
company registration with the Administration of
Industry and Commerce. The PSB will then keep
a specimen of the company’s chop for verification
in case of dispute or suspected fraud. You can
check with the PSB in the event you suspect foul
play and verify that the contract being signed is in
fact official.
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14. Production Management
and Inspections
Once your order is placed, stay involved.
Understand the production process and what
needs to happen in order to get your product
from order to delivery. In defining your
Production and QC Strategy, you highlighted the
key milestones that need to be reviewed during
production. Monitor how the factory is adhering to these milestones and pay particular attention to the
gaps. Large gaps could indicate a potential problem that you will want to address immediately.
Regular contact with the factory or your agent is highly important. You will want to pick up on delays as
soon as they become evident (although this is very difficult to do from overseas). If you can manage it,
you should plan to visit the factory during production of your goods to verify that product is being made
according to your specifications and as contracted in your order.
When the order is finished, you should insist on a production sample for your review. As we mentioned
earlier, this is far better managed by a third party if you are not able to do it in person (either for logistical
reasons or it isn’t cost effective). Your inspections should be managed according to a recognized
inspection standard. We use the MIL-STD-105E (military standard) although The American Society for
Quality (ASQ) publishes a book that defines and explains the "Zero Acceptance Number Sampling
Plans,” which is another acceptable approach to quality control.
The important point to remember is that ongoing
involvement is a big part of building your relationship
with the supplier. Getting your supplier to understand
your standards and requirements and holding them to
those standards will eventually get the factory to
self-regulate, which will save more time and expense
down the road. Involvement is the key, as an involved
customer we usually find is a happy customer.
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15. Shipping Your Products
Your product is ready to ship, it has passed
inspection and is ready to be picked up from
the factory. To manage the shipment to your
home country you will need a capable freight
forwarder – the last key piece to the puzzle.
There are many to choose from and they all
have offices (or affiliates) in every major city
across the globe. Setting up a meeting with a
forwarder that has offices near you is simple
and they can actually provide you with good
information via their overseas offices that operate in the country you will be manufacturing your product.
We actually recommend contacting the freight forwarder far earlier in the process for this very reason.
You should look for a forwarder that runs a large operation in the country where you will be sourcing your
product. This entails not only an ability to arrange freight, but also logistics, warehousing, and possibly
other services as well. These companies will likely be the most use as they will tend to have a broader
range of contacts in those markets. Some of the larger forwarders include: Expiditors
(www.expiditors.com), BDP (www.bdpinternational.com), Schenker (www.dbschenkerusa.com) and
Phoenix International (www.phoenixintl.com). But there are literally hundreds that you could select from.
Many trading companies and agents will have
extensive relationships with freight forwarders and
can pass along savings if you are working with a
good intermediary that manages a good volume of
export business.
Managing the shipping and logistics of your
delivery is the subject really of another guide.
However, the critical point is that you need to have
in your corner a solid freight forwarder to help you
smooth out the bumps and manage your
shipments for you seamlessly.
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16. Review and Improve
Our final and concluding piece of advice in
managing a sourcing initiative overseas is to find
time, after everything is done and before you are
ready to place a repeat order, to review the process
and look for a few key things you can improve.
Continuous improvement is a noble goal for any
business and when dealing with overseas suppliers,
and the complexities that this involves, there will be
problems at worst and inefficiencies at best. Take some time to review what worked well
and what didn’t and try and address a couple of the “not-so-efficient” moments by making
some adjustments. Rate your overall experience and how well you met your priorities that
you set out at the beginning of the
process. Were there any risks that you
identified and that need to be more
appropriately addressed? Ask yourself
to find two ways to make the process
better the next time around.
Summary
As noted earlier, this information is not meant to be exhaustive. Sourcing is a dynamic and
complex activity that requires cultural and practical experience. Good organization and the
selection of your suppliers and local partners are ultimately what will make the greatest impact
on assuring quality and avoiding problems. Hopefully, the process we have outlined in this
guide will help you to define and execute your sourcing strategy in a manner that will lead to
positive interactions and more importantly a successful outcome.
For more information on successful sourcing from China and for help with China supply chain solutions,
contact us at info@sertusllc.com or visit us online at www.thechinasourcingexperts.com.
Some of our clients include...
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