In Getting Your Product Made Overseas: The Pros and Cons of Using an Intermediary, we looked at the pros and cons of using an intermediary between you and your overseas manufacturer. As our regular readers know, we generally are not fans of using sourcing agents, not because we think they never have value, but because there are so many bad ones. I often describe product sourcing agents with the following: “Ninety percent are crooks or incompetents and most are both of these things. But ten percent are worth more than their weight in gold.”
What makes a product sourcing agent part of the elite ten percent and how do you find that person or company?
Way back in 2013, in How to Find Your China Manufacturer, I discussed some of the issues that arise when using sourcing agents:
Engage an intermediary (trading company, sourcing agent or factory representative) to conduct this research on your behalf. This you are going to have to pay for, one way or another. Some of these companies charge you an upfront flat fee for the work. Some charge a percentage. Some charge a set amount for the product and then buy it for less from the manufacturer. There are pluses and minuses to all of the payment methods, but generally, the more you pay early, the less you will pay in total.
Some intermediaries are invaluable. Others are completely incompetent or, even worse, flat out crooks. Some do not even reveal they are acting as an intermediary, leading you to believe you are dealing directly with the factory.
It should go without saying that you should first determine whether you need an intermediary and if you do, you must choose that person or company carefully. What does need to be said though is that if you are using an intermediary, your contract with your intermediary and the contract with the manufacturer should mesh and should be written so as to protect you, and not your intermediary or your factory. Far too often companies come to us with bad product and upon reviewing their contract with their intermediary and the purchase orders between the intermediary and the factory, we have to tell them they have no chance of any remedy.
How do international product sourcing agents charge and how should they charge? Some charge a large upfront flat fee to find your manufacturer and to negotiate terms with that company. Some charge a percentage of your manufacturing transactions for some set period of time or a some set number of transactions. Some tell you they will charge you X dollars per widget and then they find a great manufacturer who charges them X minus Y and their profit is that difference. This last category is technically more of a reseller than a sourcing agent and they usually step in for the manufacturer and guarantee the quality and timing of your purchase. Some do combinations of the above.
The best payment method for you will depend on your own individual situation. Speaking broadly, if you don’t have much money, going with one of the last two methods will likely make the most sense. The key with any pricing arrangement is that your sourcing agent be straight with you.
The problem with all sourcing arrangements — especially the first two described above — is that it is so easy for the sourcing agent to go cheap with your foreign manufacturer and then split the “savings” with the manufacturer company, without your ever being the wiser. The Quality Inspection Blog just wrote about this problem in the The Danger of Choosing a “Cheap” Chinese Factory;
It is still possible (and not all that uncommon) for your intermediary to strike a side deal with your overseas manufacturer to get a 5-40%+ hidden commission on every sale. If your intermediary does have a side deal with your manufacturer, it also has incentive to use a too-cheap manufacturer so as to be better able to hide its secret commission from you. Too-cheap manufacturers are more likely to have quality control and delivery problems.
In addition to the hidden commission, sourcing agents generally get paid a percentage on the total order value, contingent on the order getting shipped and paid. This means they have an incentive to see the order go through. A high price obviously makes it harder for the purchaser to place the order (and it will take longer to that that order approved), therefore it is to be avoided. “Many factors will push you in the arms of cheap suppliers, and it might not be in your best interest.”
But enough about how bad product sourcing agents can be. What does a good sourcing agent bring to the table and how do you find such a sourcing agent and what do you do once you have one.
A good sourcing agent will accomplish some combination of the following for you, depending on your own priorities:
- Find you a manufacturer that can make your product, or tell you that is not possible.
- Find you a manufacturer that can make your product at the quality standard you need, or tell you that is not possible.
- Find you a manufacture that can make your product at the price point you need, or tell you that is not possible.
- Not cause you to lose your vulnerable IP at any stage of the process. This means your sourcing agent should either not reveal your IP or turn you over to legal counsel to protect it.
- Continue working with your manufacturer after it has been chosen to ensure high quality or even to ensure that your products are evolving to meet changing technologies or demand or whatever.
There are a lot more things that good sourcing agents do beyond just the above, but this list should be a start.
How then do you find the right sourcing agent? How do you find a sourcing agent “worth more than their weight in gold?” The best way I know, unfortunately, is word of mouth. I say “unfortunately” because this means you already have to have in place or at least know someone who works with international manufacturing enough to be able to give you a good recommendation. My law firm’s international manufacturing lawyers have a long list of good sourcing agents, divided up by the type of product to be sourced (we don’t recommend someone on the medical devices list to someone making socks and we don’t recommend someone on the clothing list to someone making an Internet of Things product) and by country (we don’t recommend our favorite Latin American sourcing agents to someone whose product should clearly be made in either Thailand or Vietnam) and by how they charge. I assume other attorneys that do a steady stream of international manufacturing work have similar lists. Logistics companies can be another good source, as can market entry consultants and those with a long history of having their own products made overseas.
Do you use sourcing agents? How did you find them? How have they worked out?