Buying Product from China: Take These Five Steps

Co-blogger Steve Dickinson and I had a wonderful dinner the other night with Renaud Anjoran, the founder of Sofeast, a quality assurance firm that assists foreign companies with China product sourcing and quality control. Renaud has been based in Shenzhen since 2006 and he writes the Quality Inspection Blog, of which I have been a huge fan for a long time.

During our dinner, we talked about how when buying product from China, “everything is tied together.” In other words, a company  buying product from China is “only as good as” its weakest link among supplier selection, payment terms and penalties, quality control, communication and manufacturing contract. Therefore, to succeed, one must have an integrated strategy in place from the start. At the end of the dinner, I asked Renaud to write a guest post on the things on which he had been talking.

Here is Renaud’s guest post:

If you import product from China, there are five basic steps you should take to maximize your likelihood of getting the right products at the right quality. A shipment of defective or dangerous products can almost never be returned to China and your supplier is not likely to re-do your products for “free” either. Taking these five steps will save you time and money.

1. Find a Suitable Supplier.

Many importers find a nice sample at a trade show, get a good quotation from the company believed to have manufactured the sample and then think their supplier search has ended. It is very risky to choose your supplier in this way. Online directories (e.g. Alibaba) and trade shows are only a starting point. Suppliers pay to be listed or to exhibit, and they are not rigorously screened.

If your contact claims to own a factory, you can run a background check on his company to confirm this claim. Then you should go and see the factory or order a capacity audit (around USD$1,000). Try to get some customer references and call them. Make sure the factory is familiar with your market’s regulatory standards.

If your orders are small, it is usually best to avoid very large manufacturers because they will probably quote high prices and not care about your orders. However, smaller factories usually need closer monitoring, especially on the first production run. Be forewarned: showing a nice factory and then subcontracting production to a smaller workshop is very common and the source of many quality problems. Your contract with your supplier should prohibit subcontracting.

2. Clearly Define Your Expected Product.

Some buyers approve a pre-production sample and a pro forma invoice and then wire the deposit. This is not enough. What about your own country’s safety standards? What about your product’s labeling? Will the packaging be strong enough to protect your goods during freight?

These are just some of the many things on which you and your supplier should reach written agreement before money changes hands.

I recently worked with an American importer who had told its Chinese supplier that “the quality standard should be the same as that of your other US customers.” Of course when this American importer started experiencing problems, the Chinese supplier replied by claiming that “our other US customers never complain about this, so it is not a problem.”

The key is to write your product expectations into a detailed specification sheet that leaves no room to interpretation. Your methods for measuring and testing these specifications, along with the tolerances, should also be included in this document. And your contract should set forth specific dollar penalties if the specifications are not met.

If you are developing a new product with a Chinese manufacturer, you should be sure to document the resulting product’s characteristics and production processes as you cannot count on your supplier to give you this information if you later choose to switch to another factory.

3. Negotiate Reasonable Payment Terms.

The most common payment method is T/T (Bank Transfer). The standard terms are a 30% deposit before the components are purchased with the remaining 70% to be paid after the supplier faxes the bill of lading to the importer. It can get a bit more complex if a mold or special tooling is necessary during development.

Those vendors who insist on more favorable terms are usually seeking to trap you. I recently worked with a buyer who was so confident he would receive a good product he paid the full price before production. Needless to say, delivery came late and there were quality problems.

He had nothing to use to leverage appropriate corrective action.

Another popular method is to pay by irrevocable L/C (Letter of Credit). Most serious exporters accept an L/C if you specify reasonable terms.

You can send the draft to your supplier for approval before the letter is formally “opened” by your bank. Bank fees are higher than when you pay via T/T, but you are much better protected. I advise using an L/C for new suppliers or for very large orders.

4. Control Your Product Quality in the Factory.

How do you make sure your supplier met your product specifications? By going to the factory yourself and monitoring for this or by appointing a third party inspection firm to manage this process for you (for most shipments, third party quality control companies charge less than USD$300).

The most common type of quality control is a final random inspection of a statistically valid sample. This statistically valid sample gives professional inspectors enough to quickly and cost effectively draw conclusions about an entire production run.

In some cases, quality control should also take place earlier so as to catch problems before all production is complete. In these cases, an inspection should take place either before the components are embedded in the final goods or when the first finished products just get off the lines. In these cases, some samples can be picked up and sent for lab testing.

To take full advantage of QC inspections you should first have defined the product spec sheet, (see section 2 above), which then becomes your inspector’s checklist. Second, your payments (see section 3 above) should be tied to quality approvals. If you pay by T/T, you should not wire wire the remainder of your payment until your product passes final inspection. If you pay by L/C, the documents required by your bank should include a certificate of quality control issued by your appointed QC firm.

5. Formalize the Previous Steps.

Most importers are not aware of two facts. First, it is possible for an importer to sue a Chinese supplier, but it only makes sense to do it in China — unless that supplier owns assets in another country. Second, your purchase orders will aid in your supplier’s defense; they almost certainly will not help you.

To minimize your risks, you should buy your product pursuant to an OEM agreement (preferably one that is in Chinese). This contract will decrease your chances of problems and give you greater leverage should a problem occur.

My last bit of advice is that you be sure to put this entire system in place before you start negotiating with potential suppliers. Doing this will let them know that you are a professional importer and they will respect you for this. They will be more likely to agree to your requests because they will know that you can easily find another supplier. Perhaps most importantly, it will be much more difficult and much less effective if you start scrambling to put this system in place after you have already placed your order.