China 101: Sourcing from China Survival Guide (Part II)

This is the second part of a guest post by Renaud Anjouran, founder of Sofeast, a QC firm in China, and writer of Quality Inspection Tips blog, a must read blog if you are sourcing from China.
If you missed the first part of this article you may read it here.

China 101: Sourcing from China Survival Guide (tips 16 to 29)

III.Before any payment is made
16. Get pre-production samples that represent your exact requirements (in 90% of product categories, it is not a problem technically for the factory).

17. Ensure the product meets, or is designed to meet, your country´s safety standards.

18. Ensure the supplier knows what you expect in terms of packaging.

IV.If you are developing a new product with a Chinese manufacturer
19. Document product characteristics before approaching a manufacturer. Pay an engineer if the product is complex.

20. Document production processes if you are lucky enough to be in the factory while they are setting the machines up for sampling or a pilot run.

Be aware that if you decide to switch suppliers later on, you are not likely to have that information (points 19 and 20) unless you have taken the precaution of documenting it.

 V.Negotiate Reasonable Payment Terms
21. On T/T (Telegraphic Transfer, or bank wire)
This is he most common payment method. The standard terms are a 30% deposit before the components/materials are purchased, with the remaining 70% to be paid after the supplier faxes the bill of lading to the importer.

If special molds/tools need to be developped before pre-production sampling are approved, you will certainly be asked to pay a deposit accordingly. Make sure the supplier writes that these molds/tools are yours. If large sums are at stake, a lawyer can help you draft a contract.

22. Irrevocable L/C (Letter of Credit)
Try using an L/C with new suppliers (because it’s better not to wire a deposit that might get lost) or for large orders (because the bank fees are relatively low).

Bank fees are higher than a simple bank wire, but you are much better protected. Most serious exporters accept an L/C if you specify reasonable terms (don’t ask for 60+ days of credit).

It is always better to send the draft to your supplier for commenting, before the L/C is “opened” by your bank.

 VI.Quality Control
23. Control your product quality in the factory. Do not count on the factory’s own QC staff. Visit the Factory yourself, or appoint a third party inspection firm.

24. Inspect:
a) when the first finished products get off the lines (to catch issues early).

b) after 100% of the order is finished (to verify the average quality level, and to check packaging).

25. Do lab testing if neccessary. Take advantage of the inspections: pick up random samples at that time. It important not to let the supplier choose the samples by himself.

VII. Final Warnings
26. It is possible for an importer to sue a Chinese supplier successfully. But only in China.

27. The worst is to simply accept a supplier’s pro forma invoice. A slightly better solution is to issue a purchase order with your terms, and to get it chopped by the supplier. Yet this might not be enough if you want to keep the option to sue the supplier successfully.

28. The best solution is to work with a lawyer who is familiar with China’s business environment. He will draft a contract that addresses the major risks you should watch out for, and he will remove any ambiguity. Again, when buying from China, you need to be so detailed and clear that there is no room for interpretation.

29. Be sure to put this entire system in place before you start negotiating with new suppliers.
a) Tell them it is your company’s policy, and your boss/partner requires it.

b) They will be more likely to agree. If you mention a contract after you have spent days with them and they know you are in a hurry to produce, they will refuse.

What do you think? Would you like to share your tips?

You may read more about sourcing tips and negotiating with suppliers in the links below:

* 36 Tips on How to Deal or Negotiate with your Chinese Suppliers
* 21 Steps to Follow when Sourcing from China (part I)
* 21 Steps to Follow when Sourcing from China (part II)
* Sourcing from China: Who are the Happy Buyers?
* Do not Interrupt Me & 6 Reasons Why you Should Not Do It
* 4 Tips to Succeed in Times of Silence

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China 101: Sourcing from China Survival Guide (Part I)

This is another guest post prepared for the China 101 project.
This post has been written by Renaud Anjoran, who founded Sofeast, a QC firm in China in 2006, and has been writing advice for importers on his blog Quality Inspection Tips since 2009.
I would like to thank Renaud for his collaboration.

 China 101: Sourcing from China Survival Guide (Part I)

Thousands of new companies start importing from China every year, but they don’t know where to start and they tend to forget critical safety measures. Here is a “survival guide” that can help buyers eliminate 90% of the risks associated with China sourcing.

I.Finding a Suitable Supplier

1. Getting a nice sample does not mean a supplier can actually manufacture the product. It is only a basis for easy communication about your requirements.

2. Online directories (Alibaba, Global Sources…) and trade shows are only a starting point. Suppliers pay to be listed or to exhibit, and they are not rigorously screened.

3. Run a background check on the companies you shortlist. A “Business Credit Report” costs only 255 USD on Globis, and will help you spot the intermediaries that pretend to own a plant.

4. Check the factory. Look at the products they make, the processes they operate in-house, their other customers, etc.

5. Order a capacity audit, if you can´t visit the factory yourself. Every third-party inspection firm offers this service.

6. Get customer references, if possible in your country. Note that a manufacturer might refuse to tell you about their customers, and not always for bad reasons.

7. Do call those customers! You’d be surprised how often these references are fake… or these customers are actually unhappy!

8. Make sure the factory is familiar with your market´s regulatory standards. Ask a few questions, ask for relevant certificates and/or lab test reports.

9. Consider working with manufacturers of the right size. If your orders are small, very large manufacturers will probably quote high prices and not care about your orders.

10. Monitor small factories very closely. They often have no established management system. So either you trust the boss to personally look after your orders every day, or you keep a close eye on production.

11. Include a clause in your contract that prohibits subcontracting. Production might not take place in the factory you were shown, and in general product quality suffers greatly in these cases.

II.When drafting the contract

12. Clearly define your product, labeling, and packing requirements. Write a detailed specification sheet that leaves no room to interpretation.

13. Specify methods you will use for measuring and testing specifications.

14. Specify tolerances whenever applicable.

15. Specify penalties for non conformities. If you want the option to enforce this contract one day, make sure there is no room for interpretation on penalties.

Coming soon, Sourcing from China Survival Guide (part II), where we will read a lot more tips on:
-what to do before making any payments
-new product development
-payment terms
-quality control
-and some final warnings.

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21 Steps To Follow When Sourcing from China (Part II)

This is the second part of “21 Steps to follow when sourcing from China”, a guest post by Barbara Cisneros  who worked as Chief Representative in China for four year, mainly in the sourcing area.
You can read the first part here (steps 1 to 12)

by Barbara Cisneros

Once the production has started:

13. Do Quality Control, often.
Check several times. Go to the factory, even plan some “surprise” visits, so you can confirm that things are running properly, mainly in terms of quality and delivery times.

14. Do not relax – even with established suppliers.
Check every production run. Although you may have produced the same product several times, KEEP A CLOSE EYE on every single production run. DO NOT RELAX.

15. Make sure to inspect the product in the factory once production is completed.
I always inspected the product once the order was completed. Sometimes I would inspect myself at the factory, and other times, when in doubt, I would send random samples to our headquarters lab. Only if results were satisfactory, would I give the green light.

16. Do your quality control assessment again when the goods arrive at your home premises.

On Logistics:

17. Work with a reliable company.

18. Closely monitor the shipment / logistic process.
Be on top of the shipment, if you want to avoid unwanted delays and unexpected destination charges. If you do not have an export license, my advice is to use FOB conditions.

On relationship building:

19.Trust and relationship building is important for both sides.
Of course China works somehow different, but when doing long term business mutual trust and confidence will be important for both parties.

In our case, after one year of working together, we reached payment agreements with some suppliers that did not involve advance payments. Obviously, it gives you peace of mind in that fact that your payments will be done after the goods arrive at your premises.

20. Press them, but fulfil your own commitments.
It’s very important to build also a more “personal” relationship, but if they see you do not reach the committed volumes or payment terms they will back off.

A final observation, which should probably be the first one

21.Make sure it makes sense to source from China
The way things have developed lately, make sure the prices you find in China will fulfil your expectations. For some type of products, especially those that must be made according to more strict technical specifications, it may not be in your  interests any more. Take into account that in developed areas in China (the southeast mainly), the labour costs have increased by more than 10% on average per year in the last three years, and freight costs for 2012 are growing rapidly. It may be more in your interests to manufacture in other countries, or even in your own country (unless you are planning to enter the Chinese market).

What do you think?

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21 Steps To Follow When Sourcing From China (Part I)

This is a guest post by Barbara Cisneros who moved to China four years back to set up and manage a Representative Office in Shanghai. She is an outstanding professional and specially dear to me as she became a friend after I met her and interviewed her for this blog two years back, when I was just starting this journey.

by Barbara Cisneros

I’ve been working as Chief Representative in China for four year, mainly in the sourcing area. Since I was specialised in the same field and type of products, my main objective was to establish long-term suppliers in order to optimise the  cost / quality / delivery times of our products.

Some of the points that I will mention below may seem obvious, but from my own experience, and what I’ve seen others (small and medium enterprises) doing, the same mistakes are repeated over and over.

These are the tips I would give to anybody who starts sourcing from China:

Before your start sourcing

1. ALWAYS visit the factory.
Do not rely on the information on the internet. Even websites like Alibaba are not reliable enough when looking for suppliers. Sometimes a supplier is classified as a Golden Supplier for more than two years and when you visit the factory there is not much behind the online presence.
In order to find certain type of products the best way is to attend specific exhibitions.

When working on OEM projects where you want a product to be developed according to your specifications:
2. Prepare/ be ready with ALL required documents / specifications from the very beginning.

3. Check the production facilities in order to confirm that they produce what you expect.

4. Clarify and agree all technical aspects
Have a first meeting in order to make sure that you clarify and agree all the technical aspects of the product. Most of the times the standards and material specifications are different in China. Make sure you agree to use the ones that are equivalent / closest to what you need.

5. Do not assume that because they work in a specific field they are familiar with foreign specifications / nomenclature.

6. Do not expect them to be proactive.
You have to confirm that they have read and studied all your specifications. Do not expect them to act in a proactive way. Most of the time, if they have doubts they will follow their normal procedures and use the most common or cheaper materials, which may not be suitable for your product.

7. ASK and CONFIRM as many times as you think is needed.
This way you will avoid future “surprises”.

8. Be prepared to be FLEXIBLE.
For some materials/standards you may not find the exact equivalent that you need. Be prepared to be FLEXIBLE, although avoiding any degradation in quality. Discuss with them in order to reach an agreement, and provide them with different solutions. Flexibility is a must when dealing with Chinese factories.

9. Changes during the manufacturing process will lead to terrible headaches, including renegotiating prices.

10. Make sure all the PACKING information is included in the initial requirements.

11.Do no trust anybody saying “Yes, I can do it”.
When starting to produce a new product in China do not trust anyone who says “Yes, I can do it” – even if they are already your suppliers. Normally small / medium factories are specialised in one type of product / technology. For example, a factory that works with certain type of forged steel will not work with cast steel, although the products may have the same usage.

12. Consider using some suppliers as “traders”.
If you do not work with very large volumes, try to group your products with only a few suppliers. Sometimes they can work as a “trader” in some of the parts you need, getting a better offer than the one you may have obtained alone.

Coming soon “21 Steps to Follow When Sourcing from China. Part II”

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Going to War with your Chinese Supplier and 4 Ways to Prevent it

Todays post is an aggregation of two post I read last week that work well together:

1st Post
Last week I read an article on China Law Blog about a worrying trend that they are witnessing:
-In the past, when a Chinese factory provided bad product, they would usually admit it, and blame it on either a subcontractor or a supplier.
-Now they deny it and threaten to sue you if you do not pay whatever is still “owed”.

The explanation for current quality problems is the economic downturn and the fact that factories need to cut costs relying on lower quality components. But the key point in the article is the strategy shift on how to deal with serious quality problems with your Chinese supplier: (Read the full article here)

Today, the tactic is to threaten to prevent the American company from “ever doing business in China again” or, more specifically, to seize the American company’s product at the border. We take these threats very seriously and they have altered our approach to these sorts of cases.

In the past, if an American company was seeking $200,000 in damages from a Chinese company for bad product, we would most of the time seek to dissuade them from even bothering to pursue litigation. []

But the strategy changes if the Chinese company threatens to close you down. We have dealt with cases where US companies were unable to buy from any Chinese supplier without paying 100% upfront because their alleged failure to pay had caused China’s export insurance agency to refuse to insure payments from the US company. We have also dealt with way more than our share of cases where someone or something from our client was held hostage in China to secure payment.

If a US company is facing the situation above, our advise is that they sue the Chinese company somewhere, usually in the United States. Being able to show the Chinese insurance company, the Chinese police, or the Chinese border patrol agents, that you have sued can be invaluable. Your complaint against the Chinese company shows that the situation is not as simple as the Chinese company is making it out to be. Your complaint shows that the Chinese company is not necessarily owed anything at all and that you are not clearly someone who does not pay your debts.

Of course, if your company has no intention of continuing to do business with China and your personnel will not be going there again, then the best strategy probably would be to just walk away, just as in the old days.

2nd Post

When I read the article I left a comment with what I thought was the best (and obvious) advice you can give to anybody sourcing from China: “Quality Control ALWAYS, even with good suppliers”

And right afterwards, I read another article at the Quality Inspections Tips blog entitled “The 4 ways of checking product quality before shipment”. As preventing a problem is always better than having to fix it, I thought this post was a good extension to what we have previously read.

These are the 4 ways Renaud Anjouran describes in his blog (you can read his complete post here)

1.Inspections by external inspector(s) in the factory
The final random inspection is the “standard” way of checking quality. Suppliers are used to it.
It is easy to set up and relatively inexpensive, even with many different suppliers in many different places.

The supplier might interfere in several ways: only showing a part of production (usually because they are late), bribing the inspector, or shipping other products if the inspector does not stay until the container is sealed.
If the purchaser only sends an inspector after production is over, and if the inspection is failed, the supplier might refuse to rework the goods. He might wait until the purchaser is obliged to deliver his own customers’ orders.

2.Final inspections on a platform
This solution is popular with some large buyers.
Inspectors are more productive (no need to travel), and the goods can be shipped immediately after acceptance.
No risk of supplier interference.

Suppliers often resent this solution. If the inspection is failed, they have to pay for the transport back to the factory, sort & re-work the goods, and submit them again.
Not suitable for small and irregular volumes.

3.Piece-by-piece inspection in the factory -If you want to check 100% of production
The defect rate in the shipment is very close to zero after this 100% check.
The manufacturer sees what is rejected and needs to re-work it.

Suitable only for large and regular volumes in one geographical area.
Can be expensive, depending on the number of inspectors to station in the factory

4.Training & auditing internal inspector(s) in the factory
Much lower cost than sending third-party inspectors
In addition to controlling the products’ quality, the inspector can report on production status

You need a high level of cooperation from the manufacturer (no interference at all)
There might be many complications if you purchase through a trading company

What is your experience? Is it getting tougher to negotiate quality problems with your suppliers? Do you always check quality before shipment?

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China Inspection Company: Has Yours Got a “Conflict of Interest”?

One of the tips you have often read in this blog is “you need to visit the factory and, if you can’t do it, you need an inspection company to visit it for you”.  I’ve repeated this one through different stages of the supply process (when you are selecting your supplier, through the product development process, during production, for quality control purposes…)

Today I was reading about this same topic at the Quality Inspection Tips blog. Renaud Anjoran  has written a post with tips on “How to Choose a Quality Inspection Firm”, based on an article at Pro QC International  Newsletter entitled Controlling Quality Worldwide- Without Leaving your office”.

I recommend reading both of them to get some insights on how to choose the right inspection company.

Michael L. Hetzel – Vice President / Americas, Pro QC International adds in the original article an interesting angle. Had you realized that your inspection company may have a conflict of interests?
These are the two “watch-out” remarks Mr Hetzel makes:

1. They may be the company that has qualified your supplier as ISO9000 or other quality standard
“A number of companies offering third party inspection services are also ISO9000 or other quality standard registrars. This can be a non-issue for the most part, or a liability if a vendor being qualified has been registered by that company, creating a conflict of the “of course they’re qualified, we registered them” type.”

2. They may not be a real 3rd party, but work also for the supplier.
“Another potential conflict of interest lies with companies that are not truly “third party,” who work for the supplier rather than the buyer. You’ll want a company who only works for you conducting these activities, or you may as well return to reliance on the seller’s assertions of quality and conformance and save the service costs“

Have you found yourself in this situation?
Do you agree with this view?

36 Tips on How to Deal or Negotiate with your Chinese Suppliers

During the last year, I have interviewed several entrepreneurs who source products from Chinese factories. Their tips and insights are scattered across a number of posts (and a few of them I’ve not even published). Today I am going to compile most of the tips I’ve heard so far on how to deal / negotiate with Chinese suppliers ( I say most because I am probably forgetting a few). Here is the check-list:

Tip #1. Initial Search for Suppliers: directories, trade-show directories and internet
Tip #2. Not all good suppliers have English websites, get on board somebody who can help you search in Chinese
Tip #3. Existing (good) suppliers may be able to help expand your supplier network in non-competing products
Tip #4. If there is any IP involved, register it in China before you approach anybody
Tip #5. Consider registering your IP for categories similar to the one you manufacture

Tip #6. Approach them first with an introductory email presenting yourself, your company and detailing as much as possible the product you are after
Tip #7. If they do not answer fast (1-3 days) move on, they will give you trouble in the future
Tip #8. If you have a good number of suppliers to choose from, create a “pre-selection system” that helps you shortlist: level of response to your introductory e-mail response, telephone check (do they exist?), factory address provided, factory license, any certification your business requires, quality certifications…
Tip #9. Ensure you are not dealing with the middle man (I): Visit the factory… ALWAYS!
Tip #10. If you can’t visit the factory, get an Inspection Company to do it for you. It is not that expensive

Tip #11. If you are not a fluent Chinese speaker, bring a native Chinese speaker to the negotiation- he/she will be a valuable support
Tip #12. Understand perfectly the production process
Tip #13. Be very clear on who is going to be making decisions
Tip #14. The best way to do business in China is face-to-face” Technology is great, but I do not think it is the way Chinese people are wired to work
Tip #15. “I can’t” is not in their vocabulary, so be wary if you get silence for an answer…
Tip #16. Make them recap the agreements, do not assume they understood just because you feel you were clear enough”
Tip #17. Give realistic purchase estimates. If you promise 10 more times than you are planning to buy, they will cut corners to meet their profit so it will hit you back with poor quality (they work on small margins)
Tip #18. Expect long negotiations: even points that have already been agreed will be raised again in the future
Tip #19. Pricing: Do not get obsessed with the cheapest deal. Quality has a price and you should also consider that.
Tip #20. Track commodity prices used in your products
Tip #21. Learn about your suppliers cost structure (how much goes into labor, materials cost…),
Tip #22 . If your IP is involved, make sure they agree to sign a good non disclosure agreement, with non use / non circumvention  provisions (I read this one at the China Law Blog- worth reading the whole post about it)
Tip #23. Make sure you have good contracts in place. It will be a good use of your money to get a China knowledgeable lawyer to draft them (so that the terms are enforceable and it covers all the points you need to cover- IP, stocks, product quality, product specifications, penalties, etc)
Tip #24. Ensure they have the machinery & capability to produce your product. Ask them to produce a few samples in front of you, even if they don’t match your exact specifications.

Tip #25. Make sure you visit the factory during product development. It will speed the process, as nobody will tell you on the phone when they’ve got stuck with something (especially if the product is technically sophisticated)
Tip #26. Visit the factory during production & for quality control
Tip #27. If you can’t visit factory send an inspection company or somebody you trust (and is qualified for the job)
Tip #28. Don’t pay till you are sure all the product is in good condition (make sure the contract is draft that way)
Tip # 29. Never relax! Even with good suppliers. “Quality Control: Always, even with good established suppliers”
Tip #30. Always be ready with back up options- you would be surprised about how many last minutes surprises happen
Tip #31. Expect Delays in your Supply Schedule (power shortages are common, national holidays…)
Tip #32. “Problems don’t finish after production. Supervise Logistic Paperwork! There are often mistakes that will get your shipment stuck

Tip #33. Payment Terms… Some buyers feel that, once you build the business relationship,  things get easier (ex. Not requiring advanced payments)
Tip #34. Get rid of unreliable suppliers A.S.A.P. If they trick you once, it will happen again
Tip #35. Take care of good suppliers, they are not easy to find. Look for win-win when problems come up.
Tip #36. “Renegotiating conditions” is quite common. Your Chinese supplier sees the contract as the “beginning” of the relationship. If you follow tips 20 & 21 (track commodity prices & know suppliers cost structure) you will be able to assess if there is a fair reason to give in (hopefully in future productions)

Would you like to add your tips?

Quality Control, Quality Control, Quality Control. Can you hear me loud and clear?

Last week I was reading a post on the Silk Road International Blog with some very good advice from an industry expert on how to avoid getting into trouble when sourcing from China. I have to admit that I am really surprised that companies are still missing on two very obvious steps: quality control and production audits.

I’ve been interviewing China experts for some time, and there is one single piece of advice that they never fail to mention: quality control is a must and production inspections are more than advisable, especially with new suppliers.

Here are tips & quotes from some of those interviews:

Never relax! Even with good suppliers.
Production monitoring and quality control is still critical even when you work with your most trusted suppliers! The underlying issue is that our perception of what “acceptable” means is quite different. Your supplier may candidly approach you questioning why you can’t you take a product which is not meeting your specification if it still serves the purpose…”
from my post “7 Top Tips for Entrepreneurs Starting Business in China”- Interview with LinkPoint Europe.

“Be very strict with your quality control. You will annoy them but the loss is on you if something goes wrong.
I always go to the factory when my products are being made. I don’t tell them what day or what time, I just show up. When production has finished I personally inspect the product. I randomly inspect 10 to 30% of what has been packed. I make them open the boxes and I check the product is complying with the agreed specifications. I once made them open 300 boxes because I was not completely confident about the supplier.  They obviously don’t love it, it has a cost for them, but I don’t care. The loss is on me if something goes wrong…”
from my post “5 Tips for Negotiating a Dealing with your Suppliers in China”- Interview with Dalton Asia Limited.

I randomly check 15-20% of the final production for quality control, and reject anything that does not meet the agreed specifications. It’s usually not a problem as they always have excess production.
If you are dealing with a new supplier you must go for a production inspection”- Interview with Jennifer Patton from Asian Link

These are just a few examples of what experts based here recommend. But you don’t need to be based in China to fulfil this simple requirement. There are plenty of companies providing this type of service, so one wonders why buyers are still purchasing without QC and production inspections.