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.
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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.
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.
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!
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
- Intended use
- 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)
(Does the client already have a sample that the factory can copy? Will the supplier have to open a mold at its cost? Etc.)
- 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).
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?
In-depth product information
Extra points for you if you have defined a product quality checklist.
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?
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.
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?
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.
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.