Unforeseeable risks of Sourcing Products in China
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There are several reasons why sourcing products in China is an attractive alternative, such as –
- Low costs
- Relatively better quality for the cost incurred
- Easier to scale the quantity of sourcing (products)
However, what most of the people don’t foresee or notice are the hidden risks that come along with these advantages of sourcing products in China.
Real Cost of quality (product returns)
A common mistake is to forget that a certain percentage of products will have defects and be returned by customers. Therefore, a percentage of product returns/faulty products (Return Rate) should be considered and added to the product landed cost from sourcing in China.
The return rate percentage has to be factored into the landed cost price. Failing to do this means you will not make the profit you expect. Percentages vary from low-risk products, where 1 % or less is reasonable through to 5 %, for a high-risk product. Epidemic failures also occur and can be much higher than 5%. Also, the percentages will vary based on the supplier/manufacturer selected, and the price negotiation with suppliers.
Warranty claims are the responsibility of the importer, and it is unrealistic to expect a full credit from the manufacturer. Therefore, it is very important to make sure that quality control and timely inspections measures are in place to keep these unwanted costs manageable.
The two parties (manufacturer and buyer) need to gain clarity on how they will work together in case of high returns, and what kind of support is expected from either party. One common solution in normal practice is that you send returns back to China and the manufacturer issues replacements on the next Purchase Order (PO). Each party pays for one-way freight. However, the best solution is to have a China agent or partner who can make timely inspections to make sure quality control measures are well implemented.
Getting what you expect
- Inspect what you expect – a well-known phrase that you should live by.
You need to check and inspect everything you have asked for and are expecting from the products and manufacturer. This means when the goods are produced, you need to inspect them either physically in the factory or via a China agent.
- If it’s not in the Purchase Order, it doesn’t exist (OrderBOM™)
It is critical to have one documented frame of reference that encompasses all discussions, instructions, and requirements. Strings of emails, conversations on Skype, WeChat or WhatsApp all need to be translated back into an updated PO that is always signed off by the buyer and manufacturer. By adopting this practice, you avoid a lot of problems further down the line.
We have created and use our proprietary OrderBOM™ for our clients, which is very much like an extended Purchase order that ensures every instruction, every specification, and every requirement that is discussed or needed is included in your Purchase order.
- Visual vs verbal
The language barrier means it is easy for misunderstandings and misinterpretations to occur. It is essential to get confirmation that all instructions and requirements are clearly understood. The best way, no matter how long it takes, is to show each other through pictures, through designs, and via drawings, to ensure both parties understand what is needed.
- Terminologies and Acronyms
Various terminologies and acronyms are used in shipping, quality control, sourcing and in commercial terms. Using these terms and acronyms implies that all parties should be clear on critical issues.
Example: a change of the quoting terms from Free on Board (FOB) to Ex Works on a Purchase Order or quote completely alters the cost dynamics to the buyer.
Ex Works means the supplier has NOT included the price of transporting goods to the port and onto the ship. These delivery costs from the factory are going to be the buyer’s responsibility.
FOB means the supplier has included the price of transport of the goods to the port and onto the ship.
Thus, we can see that there are numerous unforeseeable risks of sourcing products in China, and the ones mentioned above are just the tip of the iceberg. For any company to source products in China, it is really important to mitigate these risks either by themselves or by using partners who have considerable experience of working in China. We have been working with our clients for many years to make sure that they are aware of these risks, and the steps we can take to mitigate these risks. We have been using several techniques such as OrderBOM™, to make sure that our clients are able to reap the benefits of their hard work to source quality products from China.