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80/20 Sourcing – Page 11 – Are you frustrated sourcing from China? Do you find communicating with Chinese suppliers daunting? As Amazon FBA and PL sellers, online sellers, and small business importers you know that time is at a premium. By applying the 80/20 rule, I will teach you how to effectively and efficiently source from China. Learn best practices from the pros, avoid common mistakes, and find out what NOT to do so you can build a 7-figure business
Are you frustrated sourcing from China? Do you find communicating with Chinese suppliers daunting? As Amazon FBA and PL sellers, online sellers, and small business importers you know that time is at a premium. By applying the 80/20 rule, I will teach you how to effectively and efficiently source from China. Learn best practices from the pros, avoid common mistakes, and find out what NOT to do so you can build a 7-figure business
How can you tell a Chinese factory from a trading company? Often times when sourcing for a product from China using Alibaba, you’re not sure if the supplier is a middleman or a manufacturer. For example one of my readers had this question:
“We have found a product and ready to place a order. But before that, we are dealing with a supplier and we are not sure if the supplier is just a “Trading Company” or a manufacturer. The price she quoted seems to be higher and she keeps on increasing the price for a smaller change or any question with the product. We want to keep this product for the long run if the sales goes good. So, we are looking for a supplier for the long run and with the best price. Please provide your suggestions and what things to be considered.. I am looking for the manufacturer. Thank you, -N.”
Before we dive in, first let’s look at why people prefer to work with factories over trading companies? Here’s are some advantages of working with a factory:
Lower prices – You cut out the middleman by going direct to the source
Transparency – you are dealing with the factory directly. In cases of any problems you know where to find them. Factories tend (though not always) not to disappear overnight.
Guanxi – You are building a relationship with the factory and their boss, ideally. Over time this trust leads to more cooperation, lower prices, better terms, and other intangibles that help to grow a business relationship.
Note there are benefits to working with a trading company if you’re able to find a trustworthy one. Potential benefits of working with a trading company include:
Saving time – they can handle the sourcing process for you
Find suppliers that you cannot locate yourself – Alibaba is not a complete listing of all suppliers. Many factories in fact do not have export licenses meaning that they cannot export products by themselves. They need someone (usually a trading company) with the proper export license to do it for them.
Better communications and better English – Trading companies typically are more polished than factories. They may have better presentations of their products and better English skills since they are focusing on the sales side (rather than the manufacturing).
Here are four quick ways to tell a factory from a trading company without flying to China.
Ask them
Sounds obvious but most times when I ask the question are you a factory or a trading company, trading companies will reveal their true identifies.
Red flags – If they give you a wishy-washy answer like we have a “partner factory” that likely means that they are a middleman. Real manufacturers have their own factories.
Common thread test
By checking a supplier’s product line, you can get a good sense whether they are a manufacturer or middleman. Factories will typically have a common thread through their entire product line. For example they may specialize in silicon rubber products. So a factory will likely have silicon gloves, silicon baking sheets, and silicon measuring cups. It makes sense because their entire production line and supply chain is configured to specialize in this one material. They have “depth” in the product selection using this material.
On the other hand, if a supplier offers iPhone cases, selfie sticks, and USB Power banks, it’s likely they are a middleman. Why? Because there’s no way one factory can manufacture such a broad line of products. The middleman is picking and choosing hot sellers from different factories and putting them on Alibaba.
Ask technical questions
I find that asking technical questions will reveal a lot about the supplier. If they can answer them then this builds confidence. If however they don’t know answers to simple questions that is a red flag.
RED FLAG: In one case when I was sourcing iPhone charging cases, one of my team members found a supplier on Alibaba that offered cases similar to one of the leading competitors. We contacted them and setup a visit. Once we met I asked the nice ladies about the charging life and they couldn’t even provide the most basic answers about charging times and battery life. Upon further questioning, they admitted that they were a trading company.
Ask technical questions to find the TRUTH: Factory or Middlemen
Ask to visit their factory
If the supplier is truly a factory interested in doing business with you they would gladly welcome your visit. In my years of sourcing, I’ve never been turned away about a legitimate factory that’s interested in doing business with us. They have nothing to lose and everything to gain by hosting you.
However, if they seem evasive about the factory or if they make an excuse that the factory is very far away then this hints that they are a trading company, probably with something to hide. In other words they don’t want to reveal the true identify of the factory to you, which is not a trustworthy way of doing business.
In summary remember the 80/20 Rule. These four methods will let you quickly identify about 80% of the middlemen found on Alibaba. And you can do this without visiting China.
What’s your #1 challenge when it comes to finding direct manufacturers versus middle men? Or do you prefer to work with sourcing agents? Hit reply and let me know!
As we turn the calendar page to 2017, now is a good time to review the forecast from China from a sourcing perspective. Here what we are seeing on the ground in Shanghai.
UNPREDICTABLE TRUMP ADMINISTRATION
One of the biggest changes in 2017 is the impact of the incoming Trump administration. If we look at the series of events involving China leading up to his inauguration, the relationship is off to a rocky start.
During campaign season Trump made numerous accusations against China, for instance accusing China of manipulating their currency. As a result Trump threatened to slap a 45% import tariff on products made in China.
After Trump’s campaign victory he accepted a congratulatory phone call from the President of Taiwan. This infuriated Beijing as it broke from the US’s strategic “One-China Policy” which never formerly recognized Taiwan as being independent thereby smoothing over US-China relations and trade.
Terry Branstad, a longtime friend of China, picked as US Ambassador to China
But Trump does understand one thing – the concept of “Guanxi” or building relations. He prudently appointed Iowa Governor Terry Branstad who admits to being a “longtime friend” of Chinese President Xi Jinping for over 30 years. Moreover Iowa has strong trade ties to China with significant exports of corn and soybeans to China. Given his guanxi and experience overseeing trade with China, the thinking is that Branstad will have greater access to Xi and Trump to help smooth over US-China relations and to help get things done. Whether that happens remains to be seen but at least Trump understands this important aspect of Chinese culture.
Guanxi – Building relationships to build business
OUTLOOK: Trump is not a predictable personality and some volatile things could happen. All in all, cooler heads may prevail though as Congress has the ability to reign him in through checks and balances. We shall see.
On the China front – four reasons why Chinese product costs are rising:
1) Raw material costs are leaping upwards
In the past 12 months Steel prices have risen about 50%. Glass, plastic resin, and other commodity prices have risen as well.
How does this affect importers? These are the materials your products are made of so your suppliers will either have to eat the cost or pass the cost increase onto you, the buyer.
Steel prices Jan 2016 to Jan 2017
2) Energy costs are through the roof
As you can see from the cost index below, coal prices have risen almost 60% from Jan 2016 to Jan 2017. Factories need energy to keep the lights on and the equipment running and they will pay more to do so. As a result this will have a direct impact on their bottom line cost, which will likely be passed onto buyers.
Coal Prices rose nearly 60% from Jan 2016 to Jan 2017
3) After years of suffering through pollution China is cleaning up… and paying the price
China is known for having some of the most polluted air in the world. Wealthy Chinese and celebrities are leaving Beijing to seek blue skies abroad. Home air filtration units are sold out here in Shanghai (cough, cough!). And it’s well known in the expat community that Beijing is a notorious place to work because of the pollution. In fact some schools have build domes over their playgrounds to protect children against the smog. Imagine playing in a bubble!
Sunrise through smog
After being the world’s factory for so many years, China is now beginning to cleanup its act. The state has enacted pollution control laws that have shut down and consolidated some of the highest polluting factories. For example fabric-dyeing mills in Zhejiang have been consolidated to more clean producing factories. But this means higher costs because the cheaper and more heavily polluting mills have shut down. Similar factory consolidations have occurred across China leading to higher prices. This is the price we pay for cleaner air and water.
4) Labor costs in China continue to rise
Here in China, labor costs are rising an estimated 9% according to a survey by the “Pudong Innovation Research Institute” and a report by Caixin. The factory owners I’ve worked with report that their factory workers can demand pay raises of up to 20% year on year. In fact there is a shortage of qualified labors now willing to accept the low salaries that factories traditionally offered.
All in all labor cost increases are another factor resulting in rising prices.
China’s labor costs rose nearly 9% in 2016
Why haven’t suppliers raised prices on me yet? The Chinese currency at a 5-year low and still dropping
Despite rising prices, China has an ace up its sleeve. It’s called the exchange rate. Unlike other currencies around the world, which are freely traded and convertible, China’s currency the RMB is controlled. In fact the government can control the exchange rate and use it as a lever to balance against an economic slowdown, which China is currently suffering from, as well as to increase competitiveness of their manufacturing, which it needs to do given the rising costs it’s now facing.
Looking at the CNY to USD exchange rate, you will find the CNY (or RMB) has been steadily depreciating since 2014. In other words, a cheaper RMB means lower prices buying from China. This is good news for importers and online sellers.
The Chinese RMB is at a 5 year low against the USD. This means lower prices for online sellers buying from China.
So what?
First of all, the rudder of this ship is how the Trump administration effects policy changes and trade with China. This will really set the tone for trade going forward once the new administration takes office. If the tone is harsh and China retaliates this may even set off a trade war and expect higher prices for everybody.
Putting that aside, China costs are definitely trending upward. Regardless of whether your Chinese suppliers have warned you (they typically do not as in Chinese culture bad news is usually kept to themselves), expect cost increases after Chinese New Year in Q2 and Q3. The exception would be if the CNY continues to depreciate to offset the increasing material, labor, and environmental costs.
80/20 Rule: Now is the time to review your business. If you have thin margins on a certain product, be prepared when the tide of rising prices hit you or else you may end up underwater.
Stay tuned and sign up for the free 80/20 Sourcing newsletter for actionable ways to negotiate better pricing, cut costs, and ways to stay ahead of competitors for more so you can make more money.
When making a payment to a Chinese supplier for the first time, you probably are at least a little concerned about getting scammed. There are a number of ways that you can reduce this risk when making payments which I’ve written about here.
But I’d like to highlight one major red flag which is wiring money to a PERSONAL account. This means that the supplier’s salesperson asks you to transfer money to a personal account rather than there company’s account. In other words the company name on your invoice and the name on the bank account DO NOT MATCH.
For example, let’s say the supplier’s company name is “Shenzhen ABC technology Co. Ltd.” When it’s time to pay they send you their bank transfer information and the name of the account holder is an individual’s name such as “Li Zhenghe.”
Why is this risky?
In some cases an unscrupulous salesperson can have a payment made to his personal account and run off with the money. Cases like this are not uncommon in China especially with high employee turnover rates and lack of clear ethical standards in today’s society.
Moreover you have little recourse in getting their money back since the individual’s name was never in writing on the invoice or sales agreement. This means there’s little you can do besides try to contact them. But often they conveniently disappear and/or quit and stop responding to emails.
If the company name and bank account do not match… an unscrupulous salesperson can have a payment made to his personal account and run off with the money.
What can you do to protect yourself?
BEST PRACTICE: Make sure that the company name on the invoice matches the bank account holder’s name when transferring money. This is the least you can do to protect yourself.
If they don’t have a legitimate reason and the amount of money is not insignificant then I would think twice before wiring that money. Don’t say you haven’t been warned!
China has just released the dates of the official holidays observed in 2017. Here’s a calendar so you can plan ahead!
The two longest holidays are Chinese New Year, where businesses may be closed up to ONE MONTH (though the “official” holiday is only one week), and National Day in October where businesses are closed for a week.
Please note that these are the official holidays for MAINLAND China. Hong Kong has a slightly different calendar as they celebrate some Western holidays as well. So this calendar would be valid for your suppliers and logistics partners based in Mainland China. For example in early February do not expect suppliers to be able to respond to you quickly or take our order while they are celebrating Chinese New Year.
Dec 31, 2016 – Jan 2, 2017: New Year’s Day (Observed)
Same as in the West
Jan 27 – Feb 2, 2017: Chinese New Year – Year of the Rooster
Though officially only a one-week holiday, in reality closures can last from several weeks up to one month. The disruption can be huge.
Year of the Rooster
Apr 2-4, 2017: Tomb Sweeping Day or “Qing Ming Jie”
Traditional holiday honoring one’s ancestors
Apr 29 – May 1, 2017: Labor Day
Same as in some Western countries
May 28-30, 2017: Dragon Boat Festival or “Duan Wu Jie”
Traditional holiday
Oct 1-8, 2017: National Day and Mid-Autumn Festival
The second longest holiday of the year. Normally two separate holidays, this year Mid-Autumn Festival and National Day are lumped together into one long holiday. Expect closures up to one week.
Hatchimals, this year’s “Furby”, are one of the hottest selling toys of the year. They are sold out everywhere, going for 2x retail on eBay, and the manufacturer, or actually the private label owner, cannot keep up with demand. So what do they do?
Instead of shipping by sea like they normally do, they are resorting to expensive air freight to desperately try to get them on store shelves in time for Christmas. But in reality their shipments may not arrive until 2017. In fact I wouldn’t be surprised if they don’t arrive until Q2 of 2017 (remember Chinese New Year).
Hatchimals, the hottest toy of the season, needs to air ship their product to meet Christmas shopping season deadlines
So as online sellers and Amazon private labelers, what can we takeaway from this?
I can share from my personal experience as one of the products we had manufactured in China is normally shipped by air from China to the US. We normally use Fedex and they offer two air freight delivery options: International Priority with 3-day delivery and International Economy with 5-7 day delivery. We normally ship by international economy to save on shipping costs as well as faster delivery and less customs clearance bureaucracy typical of shipping by ocean freight.
However we were informed this week (2 weeks before Christmas) that because of increased shipping volumes leading up to Christmas, Fedex’s International Economy option now had an estimated TWENTY (20) day delivery lead time. This is almost 4x their regular delivery time. And this puts it almost as long as shipping by sea!
On the other hand, the international priority option, while more expensive (about 40%), still kept to their original 3-day delivery lead time. Fedex is smart to drive more business to their premium shipping option during the most critical time of year.
Two weeks before Christmas, Fedex’s International Economy now has an estimated TWENTY (20) day delivery lead time. This is almost 4x their regular delivery time during non-peak delivery periods
As a result we decided to use the more expensive option to get the product delivered so as not to miss out on the end of the holiday shopping season.
Best practice: If you are expecting to ship product between now and Christmas you may want to double check with your freight forwarder to find out if they can maintain normal shipping lead times. In other words, no surprises.
Lesson learned – plan ahead to have your inventory shipped well ahead of the Christmas rush. This way you will not be forced to either take a hit on shipping fees or else lose out on holiday sales.
Chinese New Year (CNY) is the biggest holiday of the year in China. If you are an Amazon seller or importer and source from China, then this time of year can be a huge headache because Chinese factories will shut down anywhere from two weeks to a month. I’d like to share two stories with you of what can happen and what you can do to minimize the disruption to your shipments.
A friend started up an online business last year and sourced their product from a Chinese factory. They placed the order in November and the product shipped in January and sales spiked in February. However they didn’t have enough inventory in stock so they went to place a reorder. When they tried to contact the factory, the sales representative said that they could not begin the order until March. Why? Because the factory was closed for a full month for CNY. As a result, my friend’s business lost out on over 60 days worth of sales, which meant tens of thousands of dollars in lost profits. Don’t let this happen to you!
Second scenario is a former client of mine placed an order for auto parts from several suppliers in December. The factory promised to deliver before CNY which was late January. One thing led to another, in the week leading up to CNY, huge lines of trucks formed on the roads leading to the Port of Shanghai. In fact during the days leading up to the holiday, many truckers simply give up and dump their products onto other truckers to make the final delivery. Why? Because they are in a rush to get home for the holiday. As a result because of this huge backlog, the shipment missed the vessel cut off date and the shipment was delayed several weeks due to the holiday.
In fact don’t be surprised if factories themselves cannot predict impact of the disruption. There are many moving parts in sourcing and supply chain so it’s up to you to take the intiative to make sure your orders are placed on time and delivered in time before the long holiday. So what can you do to plan for CNY so you don’t run out of stock or have you shipment delayed and delivered AFTER the holiday?
But first to truly understand the impact, let’s take a closer look at the tradition of Chinese New Year.
When is Chinese New Year?
Chinese New Year, also known as Spring Festival, takes place every year between late-January to February (the date varies each year because of the lunar calendar). For example: in 2021 it will begin February 12, 2021 and in 2022 it will begin February 1, 2022. In mainland China, officially it is a weeklong holiday however it reality it will last a lot longer! This is especially true lower tier cities where factories are located. As a rule of thumb I expect factories to be impacted at least two weeks and up to one month or more!
Chinese New Year Festivities
What is Chinese New Year?
Historically Chinese New Year marks the end of a year-long time of hard work and a time for families to unite, celebrate, relax, eat, catchup on gossip, and take their salaries home to support their family. Think of it as Thanksgiving, Christmas, and New Years’ combined. In fact for many Chinese it marks the only time of year they can afford to make the long trip home.
Ties that bind – It’s important to keep in mind that in Chinese culture the families ties are a lot stronger than in the west. It’s considered a son or daughter’s responsibility or even DUTY to return home to visit their parents during Chinese New Year. If they do not they would be seen as disrespecting their parents.
Why is the impact of Chinese New Year so great?
China has 1.3 billion people. Most of the workers working in factories are “migrant workers”. In other words they are not local to the same town as the factory in Shenzhen or Dongguan. In fact during Chinese New Year, an estimated 340 million workers make the annual pilgrimage from their places of work back to their hometowns and villages. It has been called the “largest human migration in the world.” Keeping things in perspective the US only has about 320 million. Imagine everyone in the US getting aboard a train and taking a long trip back home. Can you imagine the traffic and congestion? That’s what Chinese new year feels like.
On average Chinese railways carry 6.4 million passengers per day. During Chinese new year there will be a 50x increase in demand! The infrastructure cannot support this demand. So it means that it’s really really hard to get a ticket home. So what do you do if you’re a Chinese factory worker? You buy an earlier ticket. This is why factories start closing down days and even weeks before the official holiday begins. If they tried to leave the day before the holiday there’s literally no chance they can get a ticket. And the same problem applies with buying a return ticket. In fact most factory workers will return several weeks after the official end of the holiday. Add up the additional time and you have up to a month-long holiday.
In Chinese there is a term called “Zao Zou Wan Hui” (早走晚回), which means “Leave early and return late”. That perfectly sums up the length of the holiday.
Crowded as usual at a Chinese train station
What is the impact of Chinese New Year on sourcing from China?
Given the reasons above, Chinese factories will shut down anywhere from two weeks to a month or more during Chinese New Year.
Not only that, the entire supply chain will be affected as well. For example even if your factory promises you then will only be closed two weeks, that does not mean that their raw material and component suppliers will be open. And it doesn’t mean that the logistics providers will be open. If your factory returns to work after two weeks, but their raw material suppliers are still closed until after four weeks, there’s no way they can begin production until the entire supply chain is back online.
The same problem applies to logistics. For example the week before Chinese New Year is a trucking nightmare. Long long lines of trucks will form leading to the ports. In fact, I’ve had cases where the factory has the goods done but because of trucking delays, the goods will miss the closing date to be loaded into the port and as a result miss the vessel.
Long story short there are many many moving parts involved and not a matter of just the factory getting back on track to ensure that your order goes out on time. You’re only as strong as your weakest link and during CNY many of the links in the supply chain will be BROKEN.
You’re only as strong as your weakest link in your supply chain
Moreover from the human resources perspective, Chinese New Year is a huge headache. After the holiday many workers DO NOT RETURN. Many factory workers after taking time off during the holiday to reflect, decide they don’t want to work so hard and be so far away from family and friends. So they decide to look for more comfortable service-industry jobs in their hometowns. Many older Chinese tell me that the younger generation are not willing to “chi ku” (吃苦) or as “eat bitter” and work as hard as their parents. This means that rather than toiling away in a faraway factory, away from their friends and family, they would rather look for a job at a local restaurant or hair salon in their hometown. The work is easier and the pay may sometimes even be higher.
Taking a look at the macro perspective, this is exactly what the Chinese government wants. They are incentivizing ways for China to be more a service-oriented economy and while gradually moving away from it’s role as the “world’s factory.
All this causes a major headache for the factory owner. In my years of sourcing from China factory owners tell me they expect turnover rates of at least 30% in some industries.
The other headache is increasing labor costs to retain their talent. Many factory workers expect year-on-year pay raises of up to 20% in parts of Guangzhou. If they don’t get it they are more than willing to jump ship to the next factory to get a pay raise. In fact this problem persists all across China from blue-collar factory jobs to white-collar corporate jobs.
This means that after returning from CNY, not only do they have to cope with factory workers leaving and absorbing the increase in labor costs to retain talent, but also recruiting and training new workers to replace the ones who left.
From the sourcing perspective, this means that factory productivity slow down before CNY and continue to be low after CNY. It may take another month after CNY before the factory returns to full capacity.
Now that you understand the background and impact of CNY, let’s take a look at what you can do to minimize the disruption to your business.
Chinese New Year Best Practices
Place Purchase Orders early, ideally by mid-November.
By placing your orders no later than mid or late-November the factory will have a full 60+ day lead time before the CNY rush. This improves your chances of delivery before the holiday. Keep in mind that there are many variables in play.
In the months leading up to CNY, the factory will be slammed with orders. This means the factory will have other orders in their pipeline before yours so they delivery times will be longer than normal. If a normal delivery lead time is 30 days, I wouldn’t be surprised if the factory can only promise 45 days in the months leading up to CNY. By placing your order earlier, you can get in front of the line to get your delivery sooner.
Place Orders by Mid-November before CNY rush
Ship early before the rush.
In fact if you are planning on shipping by sea before CNY, book a vessel date at least 1-2 weeks before the holiday to avoid the huge rush and risk of your goods getting stuck and missing the boat!
As a best practice I don’t trust the factory’s own cut-off dates. One of the factories I work with said that they can promise to manufacture and deliver POs received as late as late-Dec. Unless they already have product in stock I don’t believe them at all.
If for some reason they don’t keep their promised delivery date in mid-Jan and the order is not complete before CNY then I wouldn’t expect the order to be shipped out by late-Feb or March at the earliest. From your perspective this additional 30-45 day lead time could result in thousands of dollars in lost sales.
Increase your order(s) leading up to CNY and hold additional inventory in stock
Some sellers plan ahead and will place larger orders leading up to CNY so they will have enough inventory in stock during the CNY factory closures. This strategy can be effective if planned properly. But it carries additional inventory risk if your product doesn’t sell as well as expected. For example if a new competitor enters the marketplace, if competition undercuts your pricing, or if there are problems with your product which affects demand. Another risk of holding additional inventory in stock is the negative affect to your cash flow. In other words you are tying up more of your cash in inventory where it could be invested elsewhere to earn greater returns.
Have a backup plan: China +1 strategy
Many established purchasing professionals have alternate channels of sourcing besides China. In other words they sourcing in China but also from other regions such as India, Southeast Asia, Mexico, or the US.
The takeaway is that than forcing the issue with your Chinese supplier and trying to compete with the pre-CNY rush, consider sourcing from regions unaffected by CNY. India for example may be able to manufacture similar products and sometimes at a lower cost. Manufacturing of products such as textiles and shoes are being shifted to Southeast Asia to take advantage of the lower labor costs.
What NOT to do
If you placed your purchase order too late don’t expect miracles to happen. In other words if it’s not going to happen don’t plan on rushing a shipment out before the holiday. There are too many moving parts in this equation so don’t try to force them to do something that won’t happen. If you do push them overboard, the entire supply chain is already under stress and this increases the risks of mistakes, defects, and even more headaches down the line.
In closing, there is a famous Chinese saying: “With crisis comes opportunity.” Chinese New Year can be a disruption but at the same this can a great opportunity to diversify your sourcing strategy while China is on holiday. Who knows… if you place your cards right you may find a new source to manufacture your product and grow your business while your competitors are waiting for their Chinese factories to come back online.
Why are factory samples more expensive than their FOB quotations? If they quoted me $5.00 FOB then why is the sample fee $50? While you may think that they are trying to rip you off, there are a couple of reasons behind this:
Higher labor and handling fees to make one unit and prepare it for shipment vs economies of scale for a large order
Quick way to filter out the non-serious buyers – 80/20 rule
Company policies
$5.00 FOB but $50 Sample Fee!
Factories are configured to churn out large orders of hundreds or thousands of units or more. Normally the larger the order you give them, the happier they are. This is because their entire supply chain and production is configured to produce large quantities. From the purchase of the raw materials and components in bulk, to the costs of moving them to the factory, to the labor costs of the workers on the assembly line, rent, utility costs, storage, quality control, packaging, shipping, etc. Everything is configured for economies of scale. As a general rule of thumb, the larger the order, the more their cost savings on a per unit basis, and the lower the price they can offer you.
On the other hand, before you place your purchase order you probably want to ask your supplier for a couple samples. What happens next? First of all they may not necessarily have an item in stock. For example if you want to order a custom designed t-shirt from a factory they may not have the fabric or trim in stock. So they would have to purchase the raw materials and components at a higher cost because of such a small quantity. Instead of paying bulk wholesale costs from their suppliers, the factory may have to pay RETAIL costs for fabric, buttons, trim, and other components. Then when it comes to actually making a sample, often times they will have to make it by hand and not in the typical production line process. Factory equipment is not configured to cut, sew, dye, or glue just one t-shirt. You may need at least 50 yards of fabric to even start the machine for one production run. Finally the administrative costs of their staff to communicate with you the sample details, prepare invoices, receive payment, and prepare it for an international shipment all adds to the cost of the sample. So it’s not uncommon for the factory to offer an item for FOB $5 and ask for $50 for a sample.
Secondly if this is the first time potentially doing business together, the factory needs to filter out non-serious buyers. Just as you are screening suppliers looking for one that makes the right product, offers good quality, competitive pricing, and is trustworthy enough to do business with, the supplier is evaluating your in similar ways. Do they have experience in this industry or are they new? Does this person seem credible? Are they willing to purchase decent volumes are they constantly haggling over MOQ?
If you put yourself in the factory’s shoes, one of the best ways to screen out the riff-raff is by testing if they are willing to pay for sample costs. 80/20 rule – this will screen out many of the less serious or less experienced buyers and leave you with the 20% who are more likely to be a business partner.
Quick history lesson, when Chinese factories first started exporting, many offered free samples to prospective clients in hopes of capturing their business. However many unscrupulous individuals learned of their generosity and began taking advantage of them. Some abused this and requested many many samples for free so the factories learned the hard way. As they say “Fool me once shame on you, fool me twice shame on me.” Thus sample fees became commonplace.
A third reason is that some suppliers may have strict company policies enforcing sample fees. This really depends on the company and their rules.
But there are ways to reduce or eliminate sample fees. One of the best ways is to establish trust with the supplier and make them want to do business with you. By building a relationship or “guan xi” you can make them actually want to give you the product to test. Let’s role play for a minute. If you were a factory boss and a large buyer like Walmart came up to you and was interested in your t-shirts, would you charge a $50 sample fee? NO! You would gladly give them your t-shirts in every style and color you had for FREE so that they can evaluate them and place a huge order that will keep your factory busy for months!
The same strategy applies to your sourcing. If you establish yourself as a trusted buyer with experience and potential to place large orders, the factory may be motivated to not only offer you samples for free, but also better pricing, faster responses, and be more willing to customize your product.
In a huge upset, Donald Trump has won the 2016 US Election and will be the next president of the United States. Putting politics and personality aside, what does this mean for US importers and online sellers who are sourcing their product from China?
If we examine an earlier interview with the NY Times, Trump said that he would support a 45% tax on Chinese imports. Heads up, if this policy comes to pass when he takes office in January 2017, it will mean a huge big price increase if you’re importing product from China. For example if your current product cost is $5.00 per widget, with a 45% tax this could mean that your cost would skyrocket to $7.25 per piece. Now may be a good time to do a cost calculation to see if this you can stay in business under the Trump presidency!
Trump wants to raise taxes on Chinese imports by 45%
If this does comes to pass what can you do? Here are a couple of options:
Considering sourcing away from China
Consider sourcing locally from the US. The main idea of the tariff is to bring jobs back to the US. Trump is suggesting that these jobs would come back to the US. It sure sounds great to be able to order products from a company in the same country, eliminate the language and cultural barriers, get quicker delivery, all while creating new jobs, right? Not so fast.If we look the history at large companies like Walmart and their efforts at “on shoring” or bringing manufacturing back to the US, we can learn that those jobs didn’t come back for numerous reasons. One of the main reasons is the trend towards automation. This isn’t the 1920s with workers crowding an assembly line. Robots have taken over. Many manufacturing jobs that in the past required humans on the production line and now have been replaced by robot technology. Car manufacturers are a great example of this. If you visit their factory floor, you will see that it’s virtually empty except for the whirr of robotic arms assembling components to make cars. Earlier this year, Foxconn, Apple’s contract manufacturer in China, cut 60,000 jobs in their factories by replacing them with robot technology.
In an automated factory, the robots have won the jobs war
Secondly, did you know that China is losing its jobs as well? A common misconception is that China is still the cheap factory of the world it once was. In fact labor costs in China rise upwards of 20% every year. According to a 2014 survey by the Economist Intelligence Unit, Shanghai is more expensive to live in than New York City. Because China isn’t as cheap as before, it means that like China is its losing jobs to “cheaper countries”. Where are those jobs going? To countries with lower labor costs such as India, Bangladesh, Thailand, Vietnam, and Cambodia. Some savvy Chinese companies have already invested and built factories in these countries to take advantage of their lower labor costs.
Do you really believe that if Trump taxes Chinese products those jobs will come back? I wouldn’t be so naive. If we look at the trend of what major companies like Nike, The Gap, and Apple have already done, these jobs have been moving out of China to South and Southeast Asia for years. So instead of sourcing from China you may end up sourcing from India or Vietnam instead.
Negotiate better pricing from your supplier
Depending on the purchase volume, your relationship or “guanxi” with your supplier (how much the boss likes you), as well as your current pricing you may be able to get your costs down a few percentage points. But this will be a drop in the bucket compared to the big tax hike Trump is proposing.
Raise your prices
This is the natural result of the tax hike. Your customers will not be happy. But as they say, “when the tide rises all boats rise”. Your competitors will face the same stiff tax increase so everyone’s pricing will rise as a result.
In summary, the landscape could be changing very quickly if these policy changes take effect in 2017. What will you do if Trump’s 45% tariff on Chinese imports passes in 2017?
It’s trade show season and some of you may have went to the Canton Fair or one of the trade shows in Hong Kong. So you met up with potential suppliers for your product at the fair but now what?
Did you know that many online sellers go to trade shows and meet a supplier that they have a “good feeling” with. But after the show… things don’t work out like they should. For example one of my readers was sourcing a modified product and went to a trade show and met a supplier that he had a good feeling with. After returning home, he sent them a box of products he wanted them to reverse engineer and source. Afterwards he waited… and waited… and waited…. In fact he’s still waiting today. Don’t let this happen to you!
Multimillion dollar online sellers are TWICE as likely to attend trade shows
TAKEAWAY: Going to the trade show is only the beginning (not the END) of the process. Here’s how I follow up with suppliers AFTER the trade show and how the process is different for sourcing standard, modified, and custom products.
The audience paid hundreds of dollars to attend this event. But I’d like to share it with you in this presentation I gave at the Global Sources Summit in Hong Kong.
Sourcing expert Gary Huang talking about How to follow up with suppliers after a trade show. Live from the Global Sources Summit for online & Amazon sellers in Hong Kong.
Update: This year’s holiday is even longer as the National Day holiday is being combined with the Mid-Autumn Festival holiday. That means that factories, warehouses, and freight partners in China may be shut down up to eight (8) days from Oct 1-8.
Heads up – there is a weeklong holiday in China coming up from Oct 1st to 7th. The National Day or Golden Week holiday in China is the second longest holiday after Chinese New Year. How does this affect you?
Factories may be closed a portion of or up to the entire week
Logistics providers such as freight forwarders, trucking companies, and the Port may be affected as well
TAKEAWAY: Often times suppliers will “forget” to tell you about holidays in advance. So check with your suppliers and freight forwarders ahead of time to if production and shipments will get affected so you don’t miss the boat!
