Recently our President and Founder Nick Cunningham, talked to CPC Strategy about his experiences in China, touching a wide range of topics from selecting suppliers to dealing with quality issues and understanding the cultural differences related to doing business in China.
Here the full article courtesy of CPC Strategy:
Amazon Sellers & Product Sourcing
Finding new products to sell through your business is essential to company growth.
Unfortunately, the process of buying products at a wholesale price, and selling them online for a profit comes with its fair share of challenges including product research, selecting the right manufacturer, and maintaining quality control.
|We spoke with Nick Cunningham, Owner at China 2 West, a western owned manufacturing & vendor management, quality control and product development company based in mainland China to discuss the challenges of product sourcing.|
How did you get involved with Product Sourcing?
I was an officer in the British Marines for 9 years and retired as a Major in 2003. I went to China in 2004 to look at opportunities and while I was there I was asked by lots of friends and associates to source products and visit factories.
The demand for this service made me realize there was a business to be created and China2West was born.
From concept idea to market, C2W incorporates design, development, prototyping, tooling, production, quality control, certification and logistics to ensure your product sourcing experience is a success.
What is product sourcing & where can sellers discover new products?
Product sourcing is the search for reliable supplies (components), finished off-the-shelf products and / or private label product development of a concept or idea.
When we research a new product, the first point of call that we always use is our own network. We look for resources within the infrastructure that we already have – this includes friends and / or business associates.
Because most of our staff (60+ employees) have been in the manufacturing sector for quite some time, we can find pretty much any product within our own organization and network.
For very peculiar or unique products, we go through the Chinese version of Google, which is called Baidu. We find that to be an effective way of locating factories.
The reason we leave those as our last point of call is because results often come back with hundreds of different company choices. There’s a lot of work involved if you do decide to go down that route (example: determining if they are a trading company or a factory). That’s why it would be our last choice.
What about trade shows?
Trade shows are a good way of meeting suppliers, but most suppliers that go to trade shows are trading companies. This is particularly prevalent at the Canton Fair, which I personally detest.
Most or almost all Amazon suppliers have probably heard of it. Many sellers ask me if they should go to the Canton Fair to find products. There is some value in it if you are looking for a specific product. But if by chance you find a unique and interesting product, you have to keep in mind there are thousands of other sellers there – who are going to see it too.
For me, the best value is to do a lot of research on Alibaba, Global Sources, ect. and put together a list of suppliers, what their pricing is, where they are located. At that point make a selection of which factories you (or a representative) will visit.
On average, you can visit 2 factories per day in a certain province or within a certain city area. Many sellers think they can fit in 4-5 factory visits in one day, but that’s impossible. I recommend two factories per day – max.
Keep in mind that communication takes twice as long because you usually have a translator.
The issue is – unless you have a firm recommendation from someone you trust (or someone you know doing business with that manufacturer) you do not know what you’re dealing with. The proof is always in the pudding. Who knows what they are doing unless someone visits the factory.
There are some countries in the world that buy from China and don’t care about social / ethical responsibility. The U.S. is not like that. Certainly the big companies do care because bad press would be very damaging to them.
But, until you go there and look at these factories, you really don’t know who they’ve got on the production line.
What are the challenges of product sourcing?
The core challenges associated with product sourcing include:
- Culture and Education
- Quality, Standards and Delivery Timings
- Legalities and Contracts
- Copyright and IPR Protection
- Certification Compliance (UL, CE etc)
The biggest challenge is finding the right supplier. That seems like an obvious one, but it’s something that I know for a fact most people don’t pay enough attention to.
I’ve heard Amazon sellers say, ‘I don’t bother going to China or manage quality control, I just get samples and if they are good then I regard them as a good supply source.’
That is an absolute disastrous piece of advice in my experience!
You absolutely must go to the factory or hire someone to go to the factory to check it out – preferably a professional agency that knows what they are looking for in terms of social & ethical responsibility, quality and the manufacturing process.
There are so many things that can go wrong in manufacturing. You must have a good base, and that base starts from a good supplier. If you don’t know what a good supplier looks like – then you need to find out or you need to employ someone that does.
Quality fade is very real. This means when product quality declines over time.
If you have one order that’s bad – and the factory doesn’t take responsibility for it – that’s a potential disaster. You could use up your entire cash flow.
What can happen is a seller ends up with a batch of products that they cannot sell and are forced to scrap.
Even if they can sell those products, the seller runs the risk of a drop in their product / seller rating or an increase in returns. Amazon doesn’t like that very much and it’s a bucket of spiders that sellers should try to avoid.
We can send in an inspection to find out what’s going on at the factory, before you pay balances. That itself is worth its weight in gold.
What should sellers look for when selecting a product supplier?
The first thing we look at is to see if they have a business license and the certification they claim to have.
Those documents are likely to be in Chinese, which is why you need professionals to do this job. It’s amazing to me how people don’t take it seriously when they are investing so much money into a supplier in China.
You are certainly not going to get the money back if it’s not a legitimate source.
We will also conduct a financial review.
This is not necessarily something that needs to be done if you’re a small business but if you are handling large orders it definitely does.
Because Chinese law is complicated – I strongly recommend using a commercial law specialist or professional agency.
Additional tips for product sourcing legalities and contracts:
- Make a legal contract for each order.
- Put detailed product specs into the contract and annexes for engineer drawings/designs.
- Include QA plans in the annexes.
- Put a delivery date with penalties for late supply.
- Include packaging information in the contract.
- Include clause for material lab testing and penalties for non-conformance.
- Ensure that contract is signed by the companies legal representative (ie: the person named on the company charter).
- Ensure that contract is endorsed with official company stamp (same as shown in company charter) and part of stamp covers each page.
From there, sellers should look at their supplier’s production line. Is it set up in a pro-efficient way? What machines do they have there and are they capable? Are they actually making this product or are they outsourcing it? If they are outsourcing it, where are they outsourcing it to?
A manufacturer might have a nice looking factory, but if a critical component of the product is actually built in a sweatshop down the road and they don’t let you see the facility – that’s a problem (see below).
You can only be satisfied with the answer if you see it with your own eyes. Never make assumptions.
Then you need to look at their quality systems.
I employ quality engineers and they have a certain procedure they use to access the quality assurance of any given supplier that they visit.
We call this process a Factory Audit.
We perform factory audits for our customers. It takes roughly 2 days to go to the factory and write the report up (including cost, we charge $600 to $800 per audit).
A lot of people don’t want to spend that money, but I think they are mad. If you have a decent size order manufactured in China and you intend to continue using that source for years to come – then you need to spend that extra money to ensure you are working with the right people from the start.
We will provide sellers with copies of the business license, along with the factory audit- so if there are legal issues, at least you know who you are going after. Instead of going to the lawyer and saying, ‘I found this company on Alibaba – here’s the link, try going after them.’
After a factory audit, you now have pictures of the business license and of the factory. It actually makes a big difference if it comes to a legal issue.
What advice do you offer sellers who are experiencing problems with their supplier?
It really depends on what’s going wrong, but usually the issues are going to include:
- Communication problems
- Samples that are taking a long time to arrive and are wrong. Even when they correct the mistake they made in the first sample – they make new mistakes in the second sample.
- An overall feeling that the seller is not being cared for.
Because C2W speaks the same language (Chinese) and are based in the same time zone, we are able to get on the phone and hassle these product suppliers. And of course we are able to visit them which is even more powerful and being permanently China based it is the threat of visitation at any time which carries a great deal of weight.
Naturally all of that is extremely difficult to do remotely and Im sure sellers with some experience in China will have been through the process of visiting a factory, sorting out a load of issues and then arriving back home to find that nothing has actually changed. Its frustrating, time consuming and a costly exercise.
Product Sourcing: Final Takeaways
If we catch an error in China, it’s less of an issue for the seller. I’ve met sellers who have ordered $100,000 worth of products. They didn’t do any factory checks or quality inspections and when the order was delivered all $100,000 worth of this product was trash and completely unsellable.
In these situations, the factories will always come up with some kind of an excuse especially if you don’t have a long term relationship or solid contracts and quality plans in place. They will duck and dive to slide out of it and you have virtually no recourse.
It’s all a matter of getting the legals right and quality assurance plans annexed to the contract. If you have all that done then it is less likely to have problems since the supplier will take you seriously and that coupled with regular eyes on the production line will reduce risk massively. Also if you have eyes on the factory, you can spot errors early before it turns into a disaster.
When you spot errors early, the factory is more willing to fix them because it’s unlikely to be a huge spend out of their pocket. More than likely it’s a minor fix which will not cause major delays or drama.
The issue becomes infinitely more complicated if you get to the end of production and there is a major problem which may require a complete remake.
15 Expert Takeway Tips for Product Sourcing
- Factory audits essential to save time and money in the future
- Understand the difference between price and cost – The price is the number shown in the quote. The cost is the actual number you will pay when taking into account your time, travel, product defects, returns, loss of reputation, risk etc
- Get legal with contracts, etc.
- Make a solid QA plan with critical & minor defects
- Ensure material specs are part of QA plan to avoid bait and switch (i.e. Substituting inferior materials)
- Fix an ROE and base raw material price and agree an open resource where both parties can check price fluctuations (Bank of China, LME etc).
- QC Inspections essential – plan a mid and end production check
- Give yourself as long lead time as possible (quality vs speed)
- Understand that if QC inspection fails, product will need rework (delay & complications – factory probably won’t take responsibility)
- Do not pay balance until after thorough QC check
- Arrange batch laboratory or functional testing on critical component or materials
- Do your research on suppliers (by internet and by factory visit/audit)
- Get a solid NDA in Chinese language, recommend commercial law specialists in Hong Kong
- Make sure NDA is signed and stamped as per contract rules
- Get a China patent
This Article was published originally on CPC Strategy: http://www.cpcstrategy.com/blog/2016/03/product-sourcing/