Managing a supply chain that is halfway around the world is a challenge. It takes experience, courage, cultural sensitivity, and the guts and know-how to manage the complexities of production and quality. There is significant investment in inventory, and it must all be paid for up front (at least in the beginning). Learning to navigate the potential pitfalls is the only way to protect your investment and have some measure of success.
10 Key Considerations for Sourcing Product Internationally
1. Work on products you know well.
You must know what the correct cost is, understand what level of quality you can afford, and what you will need to pay to get the quality that you want.
It’s a fine balance. You get what you pay for, but will your customer appreciate what you’ve built? In a digital world, will an Amazon customer appreciate better quality, or are they looking for a bargain? It’s very easy for a vendor halfway around the world to take advantage of you by cheapening materials or shortchanging you on specifications.
To safeguard against this, you must know your product inside and out. Know the fibers, the material thickness and weights, and the required testing standards.
2. Document everything.
Document all elements and expectations for your product in a tech pack. Dimensions and tolerance (if any), materials, color standards, care and content labels, trims and packaging requirements, instruction booklets, registration cards, testing standards – all should be documented in a technical specification package. Be sure you understand what governmental regulations are required for compliance for sale in the USA. That relates to labeling.
One essential source for information is Federal Trade Commission’s Fair Packaging and Labeling Act. For cosmetics, the US Food and Drug Administration’s Cosmetic Labeling Regulations is a useful resource.
3. Watch for shortcuts.
Understand and know that vendors will take shortcuts to save money and increase their own margins. This is a given, so it is important that you know your product well enough to catch these things. Some shortcuts won’t affect the salability, quality, or use and could be good ways to make a compromise with manufacturers in order to hit your required target. Other shortcuts matter. It’s up to you know the difference and to identify shortcuts.
4. Relationships are everything.
Develop good relationships with factories. Only then can there be mutual trust and your business can then thrive. If you are changing factories every season or for each new order, you will not have consistency of product quality. The learning curve is steep and the lead times are long. The longer you work with a vendor, the more they understand your needs, and vice versa. They will know what to recommend in order to improve lead time and prices, without sacrificing quality. This only happens after working with vendors for some time.
5. Get multiple quotes and samples.
Finding vendors can be tricky. Depending on what you are looking for and the volume, you can start on Alibaba. RFQ’s help to get multiple quotes at one time, then you can request samples and have conversation to discern which vendor suits you best. Working with vendors who speak English as a second language often leads to much misunderstanding. Providing tech packs and samples for vendors to follow helps minimize this communication gap.
6. Sourcing agents can help.
Another way to find vendors is to go through a sourcing agent, of which there are many. Agents can either represent the factory (selling agent) or the customer (buying agent). The difference is whose interest they are looking out for, and that is, of course, dependent on who is paying them. Agency fees vary by volume and how much you can negotiate. In general, expect to pay 6-9% of FOB value to the buying agent. Agency fees are not dutiable (in the USA) if you are using a “buying” agent. If the factory has a “selling” agent, that cost is built into the FOB and it is dutiable.
Why Use an Agent?
- They can help you negotiate cost
- They can do product inspection on your behalf to ensure quality
- They protect your investment by staying in touch with the factories and keeping you informed
- They can push to keep product ex-factory on time which can be critically important with seasonal product
- Two such examples are Li Fung and Connor
Downside of Using an Agent
- Volume. An agent like Li Fung will require a minimum FOB value per year to dedicate staff to your account. Small sellers will never be able to work with an agent.
7. Know how to purchase.
There are several options for purchasing, and it’s up to you to know the differences between each. Below are brief overviews of the three main options:
- EXW (meaning ex-works): You are purchasing directly from the factory and the cost of transportation from factory to port is born by you (not the factory). Export docs are usually not done by the factory in this case. You will need to find a freight forwarding agent to help with the export. You are the importer of record at US Customs. You are liable for all duty and freight.
- FOB port (freight on board): The vendor (factory or trading company) pays to get the product from the factory to the freight forwarders consolidation point. You are the importer of record at US Customs. You are liable for all duty and freight.
- DDP or LDP (Landed duty paid or delivery duty paid): The vendor (factory or trading company) is the importer of record for US Customs, and they pay all duty and freight. DDP is delivered to your door. LDP is delivered to the port you select and you pick it up at the port.
Beware – if you purchase DDP or LDP, you are still liable for any mistakes, accidental or otherwise, on import entry docs. One way that vendors shipping DDP get more margin is to undervalue shipments for US Customs purposes. This means that less tariff is paid. This is fraud, it is illegal, and if you purchase DDP or LDP from a vendor who does this, you as the buyer, remain liable. It is up to you to check documents and confirm the value declared for each shipment.
8. Weigh your options.
Should you work with a trading company or directly with a factory? You will find that working with a trading company is often easier. Their English tends to be much better for one. You might also find that they can do “everything.” They are not specialists and they work with many different factories. They may not have in-depth understanding of the product that you want to make. They will have to rely on the factories to know those details, which can be hit or miss. They will have a variety of factories in their portfolio and the pricing and quality can vary greatly. They also are not in the factories often, which can allow mistakes to persist and quality to suffer. However, it is an easier way to start from scratch.
Keep in mind that in both trading companies and factories, the merchandisers get year-end bonuses based on the volume of orders they bring in and the margins they can get for the trading company or factory. In other words, you have opposing interests from the outset. The merchandiser is looking out for him or herself and for the factory first, and for you second. You will find that your negotiation skills will be tested. They don’t want to lose the order, but they want to get the highest price they can. This is where and when shortcuts are taken on the factory side to get more margin for themselves. We said it earlier, but we’ll say it again: Relationships are everything. The longer they work with you, the more reorders and new projects, the better you will be able to negotiate, and a more consistent quality will be forthcoming.
9. Get product samples.
Product samples are essential. It is key to document what you are getting every step of the way. You need first samples to confirm that you’re getting what you think you are expecting.
Next are Pre-production samples, which document all labeling, colors, trims, packaging, and product quality. Without this pre-production approval step, you cannot be sure that there is a genuine understanding between you and the factory. You should request 2 such samples, one to keep for your records and one to sign and send back to the vendor as their reference of exactly what you are purchasing. Remember, you will be paying in full for product before it leaves their factory. If it’s wrong, it is very difficult to get the factory to compensate you.
Last are TOP (top of production) samples. These will document every color and size, and they should be the same as the production sample in every way, but with a larger selection. Product should not ex-factory without approval of TOP samples.
Testing. It’s important to work with a 3rd party lab who can help you navigate the ever-changing testing regulations for your market and product. Note that regulations differ by state. A 3rd party lab will be your best resource for all regulations related to your product.
To name a few reliable sources: Bureau Veritas, SGS, and Interek. These third-party labs can do more than just test product. They can also perform final quality inspections and run human rights compliance checks on the factory itself.
10. Testing is essential.
Testing is expensive, but it’s indispensable. If you choose to use a third-party inspection company – whether one of the labs or another third-party inspection – you will have the peace of mind knowing that when you make a final payment for the goods, you have relative assurance of the quality. Inspection companies will want to know your inspection standards. Most go by AQL (Acceptable Quality Limit) standards and will need to know which level of AQL your company adheres to. You can find AQL tables online and determine which suits you best from there.
- Know your product.
- Get multiple quotes and samples from the vendors.
- Get to know your supplier – look for long term players.
- Document everything – leave nothing to chance.
- Research all labeling and testing requirements – ignorance is costly and there are no allowances for this in the law.
- Purchase FOB and engage a freight forwarder for clearance and brokerage.
- Document everything with actual samples.
- Testing is required – never take a shortcut here.
- 3rd party inspections keep vendors honest and protects your investment.
- Check all import docs – you are the importer of record. You are liable for “mistakes.”
- Be sure that you understand ALL costs. FOB is just the beginning. Freight and duty, inspection and testing, trucking to your warehouse, clearance, and marketing costs all add up.
- Sourcing 101: 10 Tips for Sourcing Product Internationally - November 19, 2019