Why pay for a 3rd party to research potential suppliers and conduct the RFQ?

By: admin | Posted on May 20, 2011

When looking to source in China, you have a number of options to find supplier with various costs involved at your disposal. Below is a behind the scenes look at the pros and cons of each option as explained by Mike Bellamy (founder of PM and Advisory Board Member at the China Sourcing Information Center).

  • Do it yourself

Thanks to free and easy-to-use websites like Global Sources.com, generating a list of potential vendors has never been easier. But make sure you have the time, engineering and China sourcing experience to narrow a massive pool of vendors down to a handful of highly qualified vendors. Simply picking the first 3 vendors that come up on an internet search is highly unlikely to uncover the best match for your particular requirements.

  • Engage an intermediary (trading company, sourcing agent or factory representative) to conduct this research on your behalf.

It is worth paying for professional research if you don’t have the time and China experience to conduct the supplier identification research on your own. There are 3 common methods used in China to invoice for the initial supplier research:

  • Charge a % of the future PO value. Generally 5 to 15%. While this is an easy to calculate figure, unfortunately there is no incentive for the research partner to keep costs low. Actually the incentive is to steer the buyer toward the most expensive sourcing option.
  • Invoice a set research fee. At PassageMaker for example, a fee of a few thousand USD is charged per production classification researched.
  • “For Free”. Some companies will offer to conduct the initial supplier identification for free. However, while it sounds the most attractive at first, nothing is done for free in China and quite often the “for free” model is the most expensive in the long run. As explained in PassageMaker’s FAQ section, their team of experienced sourcing engineers will require 30-45 days and spend 100’s of man hours, leveraging years of China sourcing experience to narrow this list from 100’s of choices down to the top candidates.

If somebody offers to “do the research for free” this is what may be really happening:

  1. They will decide which sub-suppliers to use. That means they may select the supplier which is best for them, not best for you. Perhaps where they have a relative, kickback or commission. In effect the buyer is getting steered towards a supplier which may not be the best match for the buyer’s specific requirements.
  2. “You get what you pay for”. They don’t plan to conduct in-depth research on a national level. If someone is providing research for free, they may not be as conscientious about understanding your goals and helping to find the right supplier. Keep in mind that finding the right supplier is the single most important factor in determining if your project will succeed or fail.
  3. They plan to cover the internal costs of the initial research by charging you an inflated per-unit cost once production starts. In the long run, the buyer pays too much.

Insider Tip: If your “partner” is unwilling to state the name of the sub-suppliers and give the pricing points, then you are certainly paying too much. Furthermore, if they do not disclose the actual manufacturer, then you have no way to validate the quality process in place and you have lost control over who has access to your intellectual property.

Unfortunately, even if you pay a company in China to conduct this supplier research you can’t automatically assume they are looking out for your best interests. (Know more about common pricing scams in China.) It is common in China for trading companies to milk both ends, in other words charge the buyer for a research fee or commission while getting a kick back or other commission from the supplier. Therefore, you must perform due diligence on your research partners as well. Make sure you ask about ownership, compensation structure, client references, non-compete clauses, research methodology, full disclosure of sub-supplier pricing and identity, company history, warranty terms and the plan for protecting your intellectual property.

Wishing you successful China Sourcing!