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Types of Way of Sourcing from China

Sourcing from China can follow several options:

  • A trading company –is a company that has rights to purchase and sell, therefore takes ownership of the goods.
  • An Trading Office or Agency – is an entity that does not purchase and sell but acts as a commissioned agent.
  • Purchasing from a trading company in your home country. In this instance, the trading company will add value to the chain by taking the title and risk on the goods and delivery time, while also handling all the technical and cultural issues that accompany sourcing. Typically, the trading company will add at least a 15% mark-up on the value of the goods. Mark-ups are increasingly higher if the trading company also uses an intermediary trader or sourcing company in connecting with the Chinese supplier. Another negative aspect of this option is the trader will not disclose the source of its supplies. Supplier in China --> intermediary trader/sourcing company in China (value added) --> trading company in home country (value added) --> your company.
  • Purchasing from a sourcing office that acts as a purchasing agency. The sourcing office does not take title of the goods and is typically paid on a retainer-plus-commission or commission-only basis. Suppliers are known to the buyer in this option, since they are exporting in their own names. A sourcing office/purchasing agency usually charges 5-10% commission for their services depending on volume and agreements in place. The lower costs and higher transparency of this option is accompanied with the buyer being 100% at risk for goods purchased. Supplier in China --> sourcing office/purchasing agency (value added) --> your company
  • Purchasing from your own purchasing office in China. This option works exactly like the one mentioned above, but it requires the parent company to set-up a purchasing office in China. The only question is whether your company has sufficient volume to justify the start-up costs of opening an office ($20,000-$30,000 for equipment and installation) and one or two employees ($40,000-$50,000 a year). Companies that purchase large quantities in China may find this option very cost effective versus employing a local sourcing office/purchasing agency. Supplier in China --> your own purchasing office in China (employee wages/office rent/utilities) --> your company
  • Purchasing directly from the Chinese supplier.This method is the most cost-effective as no intermediary adds value along the chain, but it is the riskiest option. Without a China presence (trading company/sourcing office/your own purchasing office), your company will put complete trust in the supplier and its ability to meet quality, price, and delivery requirements. If due diligence is not performed, this option can and has been disastrous for many foreign companies purchasing from China. Chinese supplier --> your company
Some tips for a factory inspection

Raúl Mercado, Operation Manager Director of GADTCO Global & Trading Consulting Limited This checklist is a general list of items to look into when you are visiting Chinese factories to perform due diligence. It is generally applicable, thus for specific manufacturing processes, there would be additional items to consider.

Cleanliness. A sloppy workplace (including workers’ appearances) indicates a sloppy attitude, and most likely sloppy performance. Organization. Be sure to take some time to understand the entire workflow. Does it make sense? Can you see any bottlenecks? If you do not understand something, ask questions. If you cannot ultimately understand why a factory’s workflow is a certain way, it may be a warning signal. Machinery. Get thorough explanations of what the machines do, where they are from, and other detailed questions. Asking detailed questions about the machines will make you seem smarter (thus less gullible). Listening to the answers will in fact make you smarter. Once you have toured several factories, you can make comparisons.

Quality Control. The key here is the number and location of QC checkpoints. Figure out how the rejected parts are handled. If you cannot understand that, it is likely that the workers also cannot. Employee Conditions. In China, most laborers live at the factory. Regardless, happy workers make for productive workers. Be sure to visit the employee housing areas to see how they eat, sleep and live when they are not on the floor. Location. The factory should be close to its suppliers – otherwise, there can be supply bottlenecks. It should also be close to a port from which it can ship. Finally, learn about whether there are utility quotas in the area that affect production – this is especially important for electricity.