Special thanks to Source One Management Services for this guest post
Don’t miss updates on Procurement & Supply Chain, Subscribe here!
At first sight, buying in China might seem ideal: low labor cost makes product cheaper than when manufactured in occidental factories, inducing a direct margin increase for the OEM or distributor selling in the USA. Yes, theoretically, when purely looking at numbers on papers, China appears to be the margin increase paradise. But in practice, buying in the world factory without being precautious enough can rapidly turn into a sourcing nightmare; ancillary costs, quality and communication issues, or worst, scams, are to take into consideration in order for your experience buying in China to end up as a success for your organization. Here is some tips to properly buy from a Chinese factory.
How to properly look at pricing?
Chinese manufacturer prices are lower than those in the US. But in order to have an apple to apple price comparison, several additional fees are not to forget. Insurance, logistic, customs, quality controls and international banking fees are usually excluded from Chinese factory pricing. Chinese factories will always give you a FOB (Free On Board) price. Why? Because Chinese factories get an allowance on the export tax by doing so. What does it mean for you? It means Chinese factories commit to delivering your goods to the port of embarkation, leaving you the responsibilities and associated fees to complete the delivery to your warehouse. Ancillary fees generally includes loading, ocean or air freight (these fees being the most important ones), insurance (generally a percentage of the cargo value), customs fees, delivery, and associated processing fees. Logistic fees and custom taxes represent respectively up to 15% and 25% of the product value, in addition to all other ancillary fees in regard to services providers, banking and legal services, and, potentially, sourcing or quality control companies. It is also important to make sure your organization has a proper structure and available resources to manage such outsourcing project. It can take a full time position in order to secure every aspect of your buying experience in China. While it is possible to manage these costs with the resources available within your organization, logistic suppliers can take care of this, making the process a lot easier for you. Once all these fees are taken into consideration, you can compare your total price and see if your outsourcing project is really profitable.
How to set your quality standards?
It is well known today that quality can be the biggest problem when buying in China. Bad experiences can be avoided by truly assessing your suppliers. Beyond verifying product quality, labor conditions and environmental compliance has also to be closely monitored. These new practices are part of what the biggest brands call “Responsible Sourcing” in China. Specific factory audits can be performed such as Social audit (based on SA8000), Environmental audit (based on ISO14000), and Quality control from AQSIQ licensed companies. These controls will enable you to make sure the Chinese factory you are dealing with is authorized to export to the US (this is not systematic) and guarantee the proper level of quality your organization is looking for. It is important to evaluate your Chinese business partners regularly in order to ensure the quality of the products you buy will remain consistent throughout time.
Buying and importing from China is not a simple task. Smaller companies might want to buy through Strategic Sourcing companies at the beginning in order to get familiarized with all aspect that it entails. Hiring a Specialized Sourcing company will give you access to an already established network of Chinese factories that meet or exceed these quality requirements stated above, along with useful best practices tips and pre-established processes to guide you in your buying experience. Delegating the direct communication with the factory(ies) to these organizations (that generally have resources that speak Chinese or workforce in China) will not only optimize your time and allow you to focus more on your core business, it will also reduce risks of miscommunication, resulting in a better quality service. Overall, while outsourcing projects require caution, they can prove to be highly profitable when properly done.