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An expert view on how SMBs can set up a China supply chain

The first and probably most important step in setting up a China supply chain is finding the right supplier.  My sales team wanted me to answer the question “how to set up a supply chain” with the simple answer “outsource it to PassageMaker. ”  While our company would certainly be happy to provide this service, I hate blogs that are advertisements, so for this article I decided to offer a behind-the-scenes look at how professional sourcing agents find and validate factories on behalf of their clients.  I hope this article will help “buyers DIY Source” if your project is small and/or you don’t have the budget to hire professionals like PassageMaker.

Finding the right supplier

The problem isn’t finding “a supplier”, the challenge is to find the “right supplier” for your particular needs.  Here is how to do it:

Long before you start engaging potential suppliers to collect samples and ask for quotes, you need to do two very important things:

1) Make sure you know what you are looking for.  

If you have a rough idea on the back of a napkin, it is going to be very difficult to get accurate quotes.  A DFM package (design for manufacture) should be completed to define material specs, dimensions and other features of quality or function that are important for the particular product and its packaging.  (Feel free to contact the author if you would like introductions to design and engineering firms.)

2) Determine at which level of the distribution you should be sourcing.

If your orders are small, the MOQ  (minimum order quantity) will prevent you from going factory direct and you should be researching wholesalers and/or agents. If your orders are large, you will get the best price by going factory direct in most cases and you want to avoid the wholesales and other intermediaries. For the sake of this article, as most PassageMaker clients are large enough to create a factory direct relationship, when I talk about supplier selection, I am referring to finding the right factory as the term supplier is too wide (factory vs wholesaler vs retailer).

Finding the right factory

Making apples‐to‐apples comparisons of factories at a national level can be daunting. The following article is a behind the scenes look at a how PassageMaker assists its clients find vendors in China. This system outlined below is based on 20 years of experience in China and 1000’s of sourcing programs in 100s of production categories.  This research can also be used as tool for supporting negotiations with existing suppliers.

In addition to finding out the cost for a given widget in China, a professional sourcing feasibility study also covers:

  • Security assessment (how to avoid suppliers turning into competitors)
  • Door-to-door cost modeling. This includes shipping estimates, duties and Value Added Tax (VAT) analysis
  • Analysis and ranking of actual suppliers based on your price, quality, and lead time criteria
  • Contact details (phone, fax, email, and web site)
  • Business size, scope and production capabilities
  • Assessment of factory’s English language capability
  • Comparison of samples and production methods

This sourcing feasibility study / supplier identification research should have a clear methodology for defining, measuring & verifying the desired attributes of the ideal supplier.

Step One: Defining the ideal supplier

The “right supplier” is unique to each buyer. Force yourself to list all the desired attributes of the product and factory and rank them. Beyond the holy trinity of price/quality/lead-time also think of attributes like location (do they need to be near a certain port or in area where you have other vendors), Capacity, Service Attitude, Language, Intellectual Property, Warranty Terms, Factory Ownership, Equipment, Export Experience and so on.

PassageMaker uses a proprietary and customized attribute survey to transfer this information from buyer to research team.  Here is a snap shot of part of the attribute survey to give you a feel for the kind of information that should be transferred to the research team.

Attribute Survey

Step Two: Measuring the suppliers against each other

At PassageMaker a typical supplier identification research project for complex and customized products takes 30‐45 working days assuming multiple components and production methods need to be explored, at a national level. The process is as follows:

  • Initial research generates a list of 50‐100 potential suppliers using web directories like www.globalsources.com, www.tradesparq.com and other industry/trade show directories. PassageMaker’s Approved Vendor List (AVL) can be consulted to see if any known suppliers should be added to the list.
  • Review the 50‐100 candidates’ websites and brochures against client’s desired attribute list. But hold off on asking for price or even contacting the potential suppliers until the next step. If you start asking about price too early you will subconsciously gravitate to the vendors with the lowest price. That may or may not be the best overall option. And if you ask 50-100 suppliers for quotes, you will be overwhelmed. So it’s best to do the initial round of vetting with “desk research”, narrow it down to 5 to 15 qualified suppliers, then finally make “first contact in the follow ways:
  • Send an e‐mail or make a phone call to ask for initial product‐specific information (price, minimum order size, lead time).
  • Are samples available? If they don’t have samples readily available, they probably don’t deal in your product on a regular basis.
  • Granted the sales team will be the most polished in terms of English skills, but how is their understanding of your basic requests? If you ask for information on a red umbrella and get sent a sample of a blue shoe, you are going to have problems with communication down the road!
  • Confirm the actual production location and ask for ownership papers of the factory. Be explicit that the production location may be audited and that this location cannot be changed w/out approval of buyer. (You would be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poorer quality option after the buyer leaves).

To help visualize how the suppliers stack up against each other, PassageMaker’s sourcing feasibility study incorporates charts like the following.

Map

Step Three: Verifying the top factories and picking the best supplier from short list

The above research should narrow the field down to 2 to 5 highly qualified candidates. At this stage, PassageMaker QC engineers and Sourcing Managers (joined by the client and technical auditors when needed) visit the factories in person to review quality systems, confirm production methods, negotiate pricing and look for any red flags. 

In other words, the buyer or buyer’s representatives should visit the production facility to confirm the information given during the initial research was accurate and truthful. This is an essential yet often overlooked step by those looking to cut corners during research. Unfortunately, due to the massive number of trading companies and aggressive China sales staff who will say almost anything to get your business, visiting the production line in person (or via your appointed representative) is the only way to confirm the real situation.

Based on the results of the factory visits, the next phase is sampling, trial order or even Purchase Order placement with the top vendor or two.

More tips for finding the right factory

The above process sounds easy enough, but if you don’t follow some simple tips, things can get messy.

  • Give the supplier your RFQ form to fill in which specifies the attributes you care about. That way all the suppliers are filling out the same form with the same fields. This will make it a lot easier for you to compare options.
  • For reference, also ask them to offer a quote in the standard format they use. If they don’t have a formal quote sheet, run away. That’s a red flag that they are not professional.
  • Be as specific as possible in the product description. Ask the supplier to quote to your spec. If they quote off-spec, ask them to explain in detail where their quote differs from your specs.
  • Assume the vendor is a middleman until proven otherwise, not the other way around.
  • Avoid factories that refuse to list the name or location of the production facility. If they only show a HK, Taiwan or other non‐PRC address, then they probably don’t own the PRC factory and are a middleman of some sort.
  • Focus on those factories that can clearly show production experience with your particular product or production method.
  • Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.
  • Look for clear information about operation size, equipment and staffing.
  • Most important: Don’t be seduced by the siren’s song of low price. The lowest unit price can be the most expensive supplier after you factor in the cost of defects, missed deliveries and operations headaches!

Read more on avoiding middlemen in your supply chain here!

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