Tips for importing from China

How to manage your chinese suppliers

Renaud Anjoran — Mon, 21 Feb 2011 14:22:00 GMT

Many customer/supplier relationships start nice and end up really ugly. Nurturing a relationship for 5+ years is a rare accomplishement. Most often, it ends up in arguments and bad feelings.

And what happens when a factory is late, when quality is less-than-desirable, or when a supplier increases prices at the last moment? The importer's business suffers.

From my observations, following a few guidelines is enough. Some buyers really get the best out of their Chinese suppliers, but they are a small minority.

I listed 15 strategies to manage your suppliers the right way:

There are basically three areas that you have to work on:

Set up the right buying processes;
Control quality systematically;
Communicate with suppliers for the best results.

Do you want more in-depth advice about this topic?

Download our free e-book about supplier management!

How to check a Chinese company's activity

Renaud Anjoran — Sat, 05 Feb 2011 12:22:00 GMT

Importers looking for a supplier often end up with a short list of candidates who confirmed their interest and gave reasonable quotes. So, what is the next step to pick the best one?

If the buyer is ready to invest a few thousand dollars to increase his chances of making a good choice, I usually advise him to check the company's activity with a "background check", as a first step.

A few candidates are usually eliminated this way, and then we can proceed with factory capacity audits--which are more expensive than checking a company's activity--on the last candidate(s).

So, how does a background check work?

A provider of verification services simply gets information about the target company's legal documents and financial statements. They can also gather more data and analyze them, for their most expensive reports.

This is not a service we provide. We usually refer our clients to Glo-Bis, which gets its information directly from Sinotrust. Their Business Credit Report, for 230 USD, is very useful.

There are many other options, as listed in the latest option of the China Sourcer:

Among the biggest providers of credit reports for companies in mainland China are:
- China Credit Information Service – Taiwanese and Chinese joint venture;
- Coface – French trade finance company;
- Graydon International – co-owned by European financial services companies Coface, Atradius and Euler-Hermes;
- Huaxia D&B – Chinese and American joint venture.

In addition, there are a multitude of smaller Chinese providers who are often cheaper and more flexible with regard to individual customer requirements. Yet often times their rating methodologies do not match the higher standards of the bigger players.

What do you learn in a background check?

The real size of the company: how much does it sell, and is it growing?
Their profitability and the amount of their debt: a money-losing business tends to cut corners more often, and usually indicates a poor internal organization.
Do they really own a factory? Many intermediaries pretend to be manufacturers, but you will spot them immediately based on the size of their assets and their number of employees.
The proportion of their international sales: you should avoid suppliers who sell mostly on the domestic market or to developing countries, if you cannot afford bad surprises regarding timing and quality.

Note: background checks are often called "credit checks" or "credit reports" because they are mostly used to help sellers determine the credit-worthiness of their potential customers.

How to improve your Chinese factory's organization?

Renaud Anjoran — Wed, 02 Feb 2011 14:26:00 GMT

In the vast majority of cases, importers are not invited by their suppliers to offer suggestions of improvements in their factories. I have heard many buyers explain the benefits of doing something differently, but in the end it NEVER got done.

If you are the largest customer of a factory whose boss genuinely wants to learn and improve his organization, you are really lucky. Developing your supplier will help you get better quality, with less delays, and at a better price. Go ahead!

So, where should you start? It is tempting to modify the layout of a workshop, or to embark everybody on a certain path (such as the Theory of Constraints). This is a mistake.

You will have to get clear results, and fast, before middle managers get discouraged.

The first step should be improving a few key processes (i.e. making them more stable and/or more efficient). Not only is it less invasive to the organization as a whole, but it is the real source of improvements:

Whether in nature or in a human organization, improvement and adaptation seem to take place at the detail or process level.

We can and need to think and plan on higher levels, like about eliminating hunger or developing a profitable small car, but the changes that ultimately lead to improvement or adaptation are often detail changes based on lessons learned in processes.

(Extract from Toyota Kata, by Mike Rother)

After you have improved most processes, and the managers are excited to do more changes, you can modify the layout of the operators and their machines, to reduced work-in-process. You can also set up some systematic QC checks (for example on incoming components). And the list goes on.

Looking for a Chinese supplier in online directories

Renaud Anjoran — Wed, 19 Jan 2011 03:50:00 GMT

Last week I wrote how to ask Chinese suppliers for quotations. It is a necessary step to screen potential candidates. Buyers usually get lots of surprises at this stage. It illustrates the difficult of looking for a Chinese supplier in online directories (such as Alibaba or Global Sources).

First, many suppliers show photos of products that they can't manufacture. They simply want to subcontract potential orders to legitimate factories. The problem is, they pretend to be the manufacturer themselves. It is not easy to detect, since they might have a factory but produce other items.

In such cases, you'd better not ask for a specific quotation (based on your own design or on a modification of the samples you see in photo). The intermediary will ask the factory, which will probably give him very low priority. This means inflated, imprecise, and late quotations.

Second, many advertisers already operate at full capacity and are flooded with inquiries. They pay for an Alibaba or a Global Sources profile in advance and they maintain it. But they feel they don't currently need this stream of new business.

In this case, they will usually assign a junior merchandiser to respond to inquiries, and/or they will only respond to what looks like a "big fish". If you don't look like (or don't market yourself as) the ideal customer in their eyes, they won't spend 1 min on your file.

That's why nearly half the suppliers you contact will tell you "sorry, can't do this". It can get pretty frustrating.

Find the right supplier is the cornerstone of a successful sourcing strategy. Don't wing it!

Asking Chinese suppliers for quotations

Renaud Anjoran — Fri, 07 Jan 2011 14:51:00 GMT

We started offering supplier qualification services a few months back. One of the steps we go through is sending request for quotations (RFQ) to Chinese suppliers.

The trick is to avoid sending too much information at once, or many potential suppliers will not read the message entirely. Some important considerations, such as the validity of the quotation or the factory profile, can be asked in a second step, after a candidate has invested some time in giving a quotation.

Here is the format of our RFQs:

1. In the first message to the supplier:

A few words about the customer:
(Name, country, wholesaler/retailer, website url, in business since…)

A few words about us:
It is important to explain why the customer is not contacting potential customers himself.

If you have questions: contact person:
Some suppliers are more comfortable asking questions over the phone to clarify some issues. They should be given a contact person & number.

Description of the product to manufacture:

Type of product
Photos
Intended use
Material
Dimensions
Other specs

Quantity of the first order:
(In number of pieces)

Quantity of the following orders:
(Rough forecast of the number of pieces per order, and of the number of orders per year)

Development needs:
(Does the client already have a sample that the factory can copy? Will the supplier have to open a mold at its cost? Etc.)

Quality standard:

Safety standards from the importing country
AQL (standard for most consumer goods: 0 for critical defects, 2.5 for major defects, and 4.0 for minor defects)

Please give us a quotation:
- In USD per piece
- Under FOB terms
- For a T/T 30% deposit & 70% after B/L is faxed to the customer / Irrevocable L/C at sight / any form of payment preferred by the client.

2. In the following messages to the supplier:

Please specify the validity of the quotation.
Please specify the lead time between approval of a gold sample and shipment (for the quantity of the first order).

Customer references:
Have you already made this type of product for other customers in [the customer’s country]?
Please give us a list of at least 2 of these customers.

Profile of your company:
Is your company a manufacturer? A trading company? An agent?

Profile of the factory:
How many people work in the factory that would produce this product?
Where is it? (City, province)
What is the proportion of sales for the Chinese market? For export countries? What is its main market?
Any certification?

In-depth product information

Extra points for you if you have defined a product quality checklist.

How does quality control work for importers?

Renaud Anjoran — Tue, 28 Dec 2010 12:19:00 GMT

An first-time importer asked me this question yesterday:

How does quality control work? The two things I am worried about are importing faulty products and the supplier taking my money and not shipping at all.

And here is my short response:

There are several ways you can link the payment to effective shipment of the right products. How are you paying the supplier?
By bank wire with a 30% deposit? If so, you can probably negotiate to wire the remainder after shipment (the supplier faxes the bill of lading to you, and then you do the wire). This is how you know if the shipment was done.

Or by letter of credit? Then you don't have to worry if the shipment will be done.
The second issue is, how to ensure that the products are up to your specifications?
You might trust the factory's internal QC system (and also trust that production was not sub-contracted). This is highly risky.
But the better way is to work with a quality assurance firm that will send an inspector on site.

What does it mean in practical terms?

If you pay by bank wire, you should transfer the final payment after you see a passed QC report.
If you pay by letter of credit, you should include a request for a certificate of passed inspection from your nominated QA firm.

Does it make sense?

The main advantage of third-party inspection firms

Renaud Anjoran — Thu, 16 Dec 2010 15:58:00 GMT

Some importers work with a few suppliers for a long period of time, and then find out that they should do regular quality control. Generally this decision is taken after a major quality disaster that wiped out a whole year's margin.

But how can they justify this decision in front of suppliers that have not caused any quality issue in the recent past? I have seen several purchasers in this case, and they know the supplier will take it personally (or will feign to do so).

Here is an example of justification:

We have a new company policy. A single quality accident might cost us huge amounts of money, so we will perform quality inspections before every shipment.

We trust that you have good management systems in place, and we trust that you are constantly working on improving these systems. However, we need additional safety in the form of external QC inspections.

A third-party inspection firm brings a fresh pair of eyes in the factories. Your people are constantly working on the same products, and sometimes they don't notice issues that will immediately catch the attention of an outsider.

Yes, you read right. I believe the main advantage of third-party inspectors (over a factory's internal quality controlers) is their fresh pair of eyes...

And, at the same time, it is a good argument to justify systematic QC without criticizing a Chinese supplier's organization.

Risks for small importers in china

Renaud Anjoran — Fri, 10 Dec 2010 14:12:00 GMT

At Sofeast we mostly work with small importers with their China production. They have to manage certain types of risks that larger buyers just don't have to worry about.

(In this article, I am assuming the Chinese factory employs at least 500 workers and deals directly with foreign buyers)

Risk No.1: insufficient production followup

If your orders are below 10,000 USD, it is a bit difficult to justify an in-process inspection AND a final random inspection... Which means you will probably check quality only after all is finished (if at all).

Therefore you will run into very serious problems from time to time--for example, you will discover that a whole batch is unsellable and cannot be repaired.

Risk No.2: undisclosed subcontracting

It is VERY common for a Chinese manufacturer to subcontact certain orders in smaller factories with a lighter cost structure. The objective is to face production peaks (when their capacity is fully booked), but also to reduce their costs.

Most quality disasters happen in such situations. You might signal to your supplier that it is forbidden, but they will probably do it sometimes anyway.

Risk No.3: impressive factory visits

I have been contacted several times by small importers who told me "this supplier will be no problem. You can do a quick quality check, but it should be a formality. I have visited their factory, and their organization is top notch."

And guess what? In most cases, quality was less than desirable. Either the "superb factory" subcontracted in a cheap workshop, or their quality system was simply not as foolproof as it seemed to the untrained eye.

Risk No. 4: last-minute price increases

You have heard about the short-term view of Chinese suppliers, and of their cat-and-mouse games? Well, it is not only true of small suppliers. Larger manufacturers also play games.

Expect price increases without any economic justification... But timed so that you have no choice but to agree.

Risk No.5: inflexible suppliers

If your orders represent less than 5% of a factory's annual capacity, you are a distraction in their eyes. They won't bend over backwards to satisfy your needs.

Actually they will make it a point to show you that THEY have all the power in the relationship. Even for seemingly very minor issues, such as refusing a certain packing method because "it will confuse our workers and they might make mistakes".

Some clients asked me if that was the sign that the supplier was getting prepared to screw them. My response is that it is a perfectly standard behavior, coming from a large Chinese manufacturer. Nothing particular to worry about.

Risk No.6: turning to smaller manufacturers

Many small importers come to the conclusion that they must avoid large organizations that are too expensive and don't care about them. They start looking for small workshops, under 50 workers.

What they should realize is that they will need to spend a lot of hand-holding and monitoring time (and expenses). All the savings coming from lower prices have to be invested in problem prevention. It can be worth the hassle, but be prepared for a wild ride!

Anybody had similar experiences?

What options for quality control in China?

Renaud Anjoran — Tue, 30 Nov 2010 13:29:00 GMT

If you place very large orders for production in China, quality control fees will amount to a very small proportion of the sums at stake.

In this case you should pay for the most comprehensive QC solutions, or you are definitely "penny wise, pound fool".

Now let's say your orders rarely exceed 10,000 USD, and your market is so competitive that you have to live with a thin margin. You can't pay the same amount of QC fees, right? But does it mean you should forget about covering yourself?

It is a fact that a minority of shipments from China to the US or to Europe are controlled in the factory. I think this is a pity. Many importers think "either I pay X amount of dollars for safety, or I take a risk and I get to keep my money."
The truth is, there are always intermediary quality control options. Purchasers should pay as much as they can for QC, and here are their options:

Regarding product inspections:

Solutions range from "very risky" to "best":

So, can you afford the "best" option? If so, go for it. If not, go for the "better" option. And so on.

Similarly, can you pay for the "best" option for in-process and final inspections? If not, go for the "best" during production and the "better" before shipment.

Regarding testing of product safety:

The logic is exactly the same:

Note: some quality assurance firms help their clients decrease their testing fees, by using local accredited laboratories. Savings can be up to 30%.

Regarding supplier qualification:

Once again, same logic:

This is probably the least-understood process in the typical importer's activity.

Trusting "good contacts", choosing the booth with the best-looking samples, or chasing the lowest price, will definitely get you trouble pretty fast. The best alternative is to follow a professional supplier qualification process, from identification to screening and finally confirmation.

Hiring your own inspectors in China

Renaud Anjoran — Fri, 26 Nov 2010 14:38:00 GMT

For certain importers, it can make sense to set up a company in China and hire QC inspectors. In particular when a regular flow of shipments need to be checked in the same geographic area.

When you hire an inspector (let’s say 1,000 USD per month, including housing and social security) and you give him 6 days of work a week across a few nearby cities, the direct price per inspection is pretty low.

In other words, it makes sense in narrow economic terms. But not necessarily from a business perspective:

First, your own QC staff will not have the same credibility in the eyes of your suppliers, who will suspect them of following guidelines from the purchasing/logistics department.
Second, you’d better have at least 3 inspectors and 5 factories in the same area. If not, the lack of rotation means they will get too familiar with each other.
Third, do you really want to be in the inspection business? The costs I outlined above ($1,000/month + travel expenses) are only a part of the iceberg. Will you have the resources to train and supervise the inspectors? Will you be able to implement the right set of rules, and regularly audit their work?

Some buyers hire their own inspectors in an area, and reason that they will use third-party QC firms on an as-needed basis. From what I observed, it never works out smoothly.

We got a few clients in this situation. They only appoint us for inspections during their peak season (when their staff is too busy to check everything) and/or in regions where they have no inspector.

The same problem comes back again and again: they give us many references to check in a factory, and they don’t understand why we quote several man-days. Their in-house inspectors would do it in one day, so we are either lazy or inefficient (or maybe trying to take advantage of them)... Ouch!

Why can’t they work smoothly with independent inspection companies? Because the priorities are totally different:

They try to be as cost effective as possible, while we stick to our rules of thumb (e.g. the maximum number of samples to check in 1 man-day) to always live up to our standard.
They can make up their rules as they go, while we’d rather have a clear checklist before the inspection and follow it objectively.

So, before you decide to hire your own inspectors in China (or in Vietnam or in India or wherever for that matter), think through it carefully and analyze the pros and cons.

And remember, one quality disaster wipes out months or even years of small savings.

IP protection for manufacturing in China: the basics

Renaud Anjoran — Sat, 20 Nov 2010 07:43:00 GMT

Most importers know that intellectual property (IP) is not respected the same way in China and in their country. But what exactly are the dangers for manufacturing in China, and what can be done about it?

Register your trademark in China

You have your own brand and you don't intend to sell anything in China, so why bother about this? Here is why:

Registration can protect your future access to the Chinese market, prevent the export of counterfeit goods from China, and prevent a competitor from registering your mark in China, which would prohibit you from exporting your own product from China.

Do not give sensitive information in full

Do not give a Chinese supplier all the information he needs to steal your IP and/or contact your customers directly.

If you teach a factory how to make a complex or original product, if you ask them to take care of the packing and the labeling, and if you let them ship directly to your customer's warehouse, you are taking very high risks.

The key is to decompose these sensitive activities, so that different parties (that cannot find each other) complete different steps.

Get all the IP generated during development

This might seem surprising, but in many cases Chinese suppliers end up controlling most of a product's IP (designs, molds and tooling, technical blueprints, source of components...) which the importer does not have in his possession!

Chinese factories will do all they can to increase the hassle for your to switch to another supplier. They are often dishonest and unpleasant regarding these issues.

For example, if your supplier agrees to pay for custom-made molds himself, he will not give them back to you down the road... whether you got his agreement about it by email or not!

Contracts reduce risks of trade secret violations

If you are still concerned about IP protection, an enforceable contract (drafted in Chinese by a specialized lawyer) can help you.

But most small factories would refuse to sign it, and many trading companies that might accept it cannot control what the manufacturer really does. There is no perfect solution...

Direct sourcing in China: what functions should importers perform?

Renaud Anjoran — Fri, 12 Nov 2010 09:58:00 GMT

Direct sourcing has been the dominant trend over the last 20 years. It has allowed a reduction of FOB prices, but has often resulted in higher overall costs and lower reliability.

The good news is, importers can work much more professionally if they manage the whole process themselves. The bad news is, it is not free and it takes initiative.

Fifteen years ago, most importers were working with trading companies (either intermediaries based in Hong Kong, or “import & export” firms on the mainland). This set up had a cost (the trader’s margin, at that time, was seldom below 20%), but purchasers were giving their business to professionals who were carrying certain functions (quality control, problem solving…).

When it came time to reduce prices, the answer was obvious: “cut the middleman” and “go direct to the factory”. Today, direct sourcing is the only solution contemplated by many importers in China.

Unfortunately, they often think they don’t need local support. It can work fine for a while, if they are lucky enough to find a good factory. But it can derail their whole operations very quickly.

What type of local support does an importer need? Let’s look at the main functions traditionally managed by trading companies:

Match making: either via a trusted network (for insiders only), or through a more scientific approval process comprising of supplier pre-qualification, background checks and factory audits.

Completing product specs: most importers don’t bother to define their all their expectations. Someone has to decide what packaging materials to source in 90% of cases. Relying on the factory is very risky, and a better solution is to pay a QC firm to define it clearly once and for all.

Quality control: by third-party inspection agencies or in-house staff. The use of statistical tools that are also used by retailers in the importing country reduces the risks of rejection of a batch that was accepted back in China.

Reducing payment risks: rather than relying on a supplier’s reputation on the local market, buyers should use tools such as letters of credit or OEM agreements.

Getting out of trouble: this is probably the most under-rated function of a good intermediary. When problems arise—and they will—an importer cannot just solve them by emails and phone calls.

China quality problems: where do they come from?

Renaud Anjoran — Wed, 03 Nov 2010 11:09:00 GMT

Many people seem to wonder, where do China quality problems come from? Yet they are afraid of the type of response they will get. Is it racist to affirm that China's quality, compared to similar products made in more "developped" nations, is usually inferior? No, but the most important is to understand why (and what to do about it).

I think we can distinguish four main sources of China quality problems:

1. The sourcing game

Importers don't refer good factories to each other (actually, their product source is treated as a secret). That means suppliers can produce substandard goods with no consequence on their reputation (all they can do is lose one customer).

There is much to be said about the short term behavior of many purchasers, who switch to save a few pennies. Not surprisingly, factories don't really expect repeat orders and don't invest much in their customer relationships.

>> My advice: get as few suppliers as possible (but cultivate a back-up for important projects), follow production very closely, recognize that a reliable factory is an asset and give it regular attention, and walk your talk at all time.

2. Human resources management

Factory bosses, in their vast majority, display no respect for workers. The main consequence is that a factory job is usually just a temporary job -- no training, and no "pride in workmanship".

Managers tend to point fingers at particular workers (when problems are noticed) rather than improving processes. So the operators try to "remain below the radar" and to "game the system".

Line workers are paid by the number of pieces, which pushes them to churn out the highest quantity they can -- until late in the night. Defects are usually noticed much later in the chain (if at all) and there is very little accountability, so the faulty operator seldom gets to repair his own mistakes.

>> My advice: for large / sensitive production runs, have quality inspected during production (as early as possible, to catch issues and implement corrective actions).

3. Production organization

When I started going to Chinese factories for my clients, I was shocked to see that the owners had no interest in (and no awareness of) manufacturing best practices. They only see how their neighbors -- or previous employers -- are organized.

The reason is that bosses focus all their energy on growing their businesses as fast as possible, rather than on improving efficiency and profitability. It's all about face: they want to show off with the biggest building and the longest car.

>> My advice: get references of other customers and call them. Get information and avoid potential suppliers experiencing explosive growth.

4. Poor design

To be fair,all quality problems don't come from the Chinese side. Many importers don't have any product knowledge, and it is so easy to let the supplier develop and custom-make the products of their dreams... Purchasers seldom seek external assistance to verify that their product contruction is sound and safe.

>> My advice: get help from a quality control company for new product analysis and specifications.

Fortunately, more and more Chinese factories make high quality goods. Even some Japanese medical supplies are sourced in China, and from what I heard that means something...

Preventing quality problems in China: 3 steps to watch

Renaud Anjoran — Mon, 25 Oct 2010 15:28:00 GMT

Last week I had an interesting discussion with a purchaser of electrical equipment. His company has experienced different sorts of quality problems in China, and categorizing them was quite useful:

1. Quality problems due to poor design

The product development stage deserves the most time and attention. Why? Because it is much easier and cheaper to "design quality in" from the start, rather than fixing problems later.

The importer I discussed with experienced a problem in the construction of his product, which created a safety hazard to the user.

Since then, he pays TUV for an in-depth product validation (which includes a clear description of each assembly step). I believe every dollar spent to prevent issues down the road is an excellent investment.

2. Quality problems created during production

A solid design is worthless if the factory makes mistakes or deliberately cuts corners.

There are 3 critical steps for getting a shipment that is conform to your expectations:

Approving the right factory (with background checks, factory audits, and/or visits by managers);
Communicating clearly your product specifications and your quality standard;
Following closely what they do (with product inspections, if possible after 20-30% of production is complete and just before shipment).

3. Problems arising because of improper customer use

This third step is often forgotten, but fixing quality problems is extremely expensive once your products are in your customers' hands.

To get back to my earlier example: the importer gets many returns because the end customers use their adapters for electrical devices that consume too much power! The adapters break up and the users turn to the retailer for a reimbursement...

The solution would be to clearly (and obviously) label the conditions of use.

And, in an ideal world, the best is to make improper use IMPOSSIBLE with some sort of foolproof system. For example, the ATM machine gives the card back after the user gets his cash (except in China, where the process is reversed -- once again, beware of your assumptions when you buy here).

Does a letter of credit really protect an importer in China?

Renaud Anjoran — Mon, 18 Oct 2010 06:15:00 GMT

We were exhibiting on a Hong Kong trade show this week, and I got to talk with many importers. I noticed that some new buyers hold the misguided notion that a letter of credit protects the importer.

For example, I asked one purchaser "do you already do some quality control?", and he replied "no need, we pay by letter of credit". I had to explain that the letter of credit triggers payment before he can see the products, so he'd better have someone check them before shipment.

Generally speaking, a letter of credit does protect an importer of China-made products, especially if he takes the time to list out adequate requirements.

How does a letter of credit work?

Basically, a letter of credit triggers payment to the exporter only after certain pre-determined documents have been sent to the bank.

For example, if the quantity of products shipped out (as seen on the packing list and on the bill of lading) is outside the tolerance set in the letter of credit, it causes a discrepancy. In this case, the importer has the choice to accept it (in which case he can receive the shipment, and the supplier gets paid) or to refuse it.

Therefore, the buyer does not (usually) need to wire a cash deposit that gets him "hooked" to a potentially unethical Chinese supplier. The importer keeps the freedom to refuse the products (and cancel the payment) if at least one document is either missing or not conform.

The two major risks to keep in mind

First risk: receiving defective or substandard products.

The solution: ask for a certificate of inspection, issued by the quality assurance firm of your choice.

Second risk: the supplier can cancel the order anytime (this usually happens only if they have not purchased the materials yet, or if they can use/sell the products with another customer).

The solution: choose your suppliers wisely, start small with first orders, and keep some flexibility in your plans.

How to calculate the total landed cost of imported products?

Renaud Anjoran — Mon, 11 Oct 2010 14:29:00 GMT

I see a lot of new importers on trade shows. They come to China to find a supplier, or a product idea, and they are ready to learn as they go.

The first thing they struggle with is calculating the total landed cost of the product they want to import. If it costs $1 per piece under FOB terms in China, can they deliver it for $2.5 per piece to retailers in their country? Can they sell it $3 online? Will they turn a profit?

I listed the main costs in several categories:

1. The green dollars

What I call "green dollars" is the hard costs that you can calculate. More about the soft (grey) costs later in this article.

1.1 What you cannot avoid to pay

Purchasing price from the supplier (including packaging, mould opening...)
International shipment (under FOB terms), usually managed by a freight forwarder of your choice -- be careful, shipping rates vary from month to month;
Import duties applicable to your product (ask your country's customs office, or your forwarder, for this information);
Domestic delivery to a warehouse (and possibly another delivery from your warehouse to different customers).

1.2 What is recommended to pay

You can do without these costs, but they will reduce your risks and might litterally save your business!

Assistance to qualify a supplier, with background checks / factory audits / subjective opinion of a sourcing consultant;
Quality inspections (to check if your products are acceptable) during and/or after production;
Tests in a third-party laboratory (in case your product might cause safety issues);
Letter of credit through your bank (to avoid the risk of losing a 30% deposit if the supplier plays games);
Product liability insurance (for products that might harm users);
Transport insurance (in addition to international shipping costs).
OEM agreement, drafted by a specialized lawyer.

1.3 What you might be forced to pay

Production issues happen regularly in China. They will cost you time and money. That's why you must target a healthy margin, or you will often end up in the red. Here are a few common examples:

Several shipments instead of only one, and/or air freight fees (if production is late and your supplier does not accept the responsibility);
Increases in material costs, passed on suddenly by the supplier;
Depreciation of your country's currency (for example, if you are in Europe and you pay in USD) between the order and the payment.

2. The grey dollars

Production delays and quality issues can cost a lot to your business, even though you have not included these expenses in the total landed cost of your products:

In the short term, you might have to put out fires at great expense (see part 1.3 above). You might also have to deal with chargebacks and product returns from your customers.
In the long term, it also shows that you don't deliver as promised. As competition gets tougher and tougher, do you want to appear unreliable in the eyes of your market?

Image credit: pshegubj

Shipping marks: what should be written on export cartons?

Renaud Anjoran — Tue, 28 Sep 2010 14:39:00 GMT

The "shipping marks" designate what is written on the export cartons. Usually, the importer specifies what the supplier should write.

Some buyers have asked me "what is required on shipping marks of cartons from China?"

There are different needs to address:

1. For international freight

The info on the cartons must correspond to what is written on the supplier's packing list. In most cases, the following fields are printed on the boxes:

Purchaser's name and/or logo;
Product reference and/or order number;
Net weight & gross weight of 1 carton;
Dimensions of 1 carton;
Number of carton (example: 1/230; 2/230; 3/230...);
Country of destination (for example, a forwarder might have to distinguish some cartons for Canada and others for the US).

2. For the warehouse(s) or distribution centers

The cartons will probably be handled in the importing country, and reshipped to individual stores. It is essential to keep track of what exactly is in a given box. Here are a few classic fields:

Product reference (SKU) and/or order number;
Other relevant information about the products: season, size, color, or breakdown of the different types of goods inside a particular carton;
The above information is often contained in a barcode or an RFID tag, for faster processing.

3. Other considerations to keep in mind

Should the shipping marks be printed by the carton manufacturer (more prone to errors), or should they be on a piece of paper glued by your supplier on the cartons (easier to correct, but not as resistant)?
Should they be on the long side(s), on short side(s), or on both? The most important information (SKU and/or barcode) are usually on the short side, since it is still visible after the cartons are stacked up.
Should you allow handwriting? Certain fields (weight & carton number) are usually handwritten and can be difficult to decipher.
Should you impose a minimum size of characters, for easier reading in your warehouse?
In case the adhesive tape is not transparent, the marks and the barcode should NOT be covered.

Am I forgetting something? What do you think?

A guide for importers: quality assurance in China

Renaud Anjoran — Thu, 23 Sep 2010 02:18:00 GMT

You have heard several horror stories about China production quality, and you wonder how to avoid these risks?

Or you already source from China, but you struggle to put in place an effective quality assurance system?

Unfortunately, there is no good guide for importers about these issues.

I have worked with tens of importers, and talked to hundreds of others. The same lessons come back again and again, from their experiences: there is no cookbook, but following a few best practices helps avoid 90%+ of “China mistakes”.

I condensed these best practices into 4 essential quality assurance rules.

Choose the right supplier:

Easier said than done, of course. If you give an order based on a photo you saw on Alibaba and on a low price, you are rolling the dies. You should assess the business fit between your two companies, as well as the capabilities of the factory.

Describe what you want to receive:

Approving a sample is not enough. You should write the specifications of the finished product, and if possible also the list of materials. If you don’t do this, you leave the choice up to the factory, and they will go for the cheapest option.

Do not pay the whole amount before you know what you will get:

Once you have paid the whole order, most Chinese suppliers stop making efforts. They never know if they will get additional orders from you. So you should either open letters of credit, or tie each payment to a specific confirmation (e.g. you check production quality).

Send your representatives in the factory on a regular basis:

If the factory managers do not know you, and if you don’t keep them on their toes, they will give their attention to other customers. And that means your orders will be more likely to be late and/or of unacceptable quality.

Any other essential quality assurance tips for importers?

Do you want more in-depth advice about this topic?

Download our free e-book about quality assurance in China!

How to follow the schedule of your China production

Renaud Anjoran — Tue, 21 Sep 2010 13:23:00 GMT

Many importers negotiate a shipment date (ETD) with their Chinese suppliers before orders are issued, and then fail to follow up on the production schedule.

I think they would avoid a lot of bad surprises if they asked for regular updates.

Here are a few tips, but first let's see what you want to avoid.

The danger of flying blind

Chinese suppliers know that asking for 3 weeks of delay is usually rejected. The purchaser might respond “if you ship that late, you’ll have to pay air freight”, or “in that case, the letter of credit won’t be valid anymore; the order is canceled”.

So what do savvy exporters do? They don’t tell reveal the situation clearly and in advance. They wait until 1 or 2 weeks before original ETD, and they announce a one-week delay “because the materials arrived late”. Then another 5 days “because of power shortages”. Then another 5 days “because we don’t have enough workers”. And so on, until production is three weeks behind schedule.

This process can be devastating for an importer who promised a delivery date to his domestic customers, and who has to keep postponing it.

How to avoid discovering delays at the last minute?

Before issuing an order, you should ask for the following milestones:

Arrival of all materials/components (and, if relevant, inspection of these inputs)
Start of bulk production
Sending of production samples
20% of order is finished (and, if relevant, in-process inspection)
50% of order is finished
100% of order is packed (and, if relevant, final random inspection)
Ex-factory date (this one will be known about one week before ETD)
Shipment date (ETD)

Then, when you reach each milestone, you can ask your supplier whether it was achieved. If not, they should update all remaining dates.

Sending an inspector is a good solution to check the production status, in addition to verifying product quality.

Can you afford to do this?

If you place orders with many suppliers, you might not have time to follow all these dates. And if your orders are not very large, you might not want to bother your suppliers with so many updates.

In such cases, you can reduce the number of milestones.

For example: start of production, 20% of order completed, 100% of order packed, and shipment date.

The most important is to keep some visibility over the production schedule!

Photo credit: ASurroca