by Etienne Charlier
Selecting China suppliers must be the most influential decision in the sourcing process. For years, all people who know how to purchase in China have described how to properly select suppliers. And yet, from time to time, you hear of horror stories that could have easily been avoided. Here is one of those cases. It started as a horror story but finally ended relatively well.
Some time ago, a good friend of mine called me with a problem. He was hired by a European distributor of high value consumer goods. The distributor focused on a range of core products designed in-house and subcontracted. In addition, the company carried lots of low cost accessories purchased from European wholesalers but made in China. Given the annual volume the distributor needed, there was a strong pressure to source directly from China.
So far, so good. But this is not why my friend called me.
Half a year before the call, one commodity manager had attended a trade-show in London. There he had met a Chinese company promoting the types of products the commodity manager needed.
Still no problem here.
After initial conversations on the booth, and some price negotiations, the manager and the supplier achieved a deal. The European company placed a purchase order for USD 250,000 worth of goods, subject to sample approval.
As you suspect, this is where it all goes down the drain.
Six months after the purchase order, sample approval and a down-payment of 50% of the total value, no goods were shipped. When a first small shipment arrived, the goods were totally unusable.
The supplier was still responding to email communication from the European purchaser, but nothing more than that. This is at this point that my friend called me.
Hearing the story from my friend, I grew very worried. It smelled like a worst case scenario running in front of me. My friend sent me the suppliers details so that we could investigate the case.
This is what we discovered:
It would have taken less than one week to realize most of this before placing a large order and certainly before paying 50% of USD 250,000.
Now getting the prepaid cash was rather unrealistic.
For once, the buyer was somehow lucky. The trader was not able to deliver the goods, but it was also honest and did not just run with the money. In addition, when the European purchasers understood the quality problem’s real cause, they were flexible and patient enough to discuss with the trader and to find a range of products that could be reliably supplied to replace the goods that were ordered.
Eventually (two years later) both parties found an agreement and new products were shipped to settle the initial down payment. The European buyer did not lose any direct cash in the transaction, but wasted a tremendous amount of time and management energy in solving the problem. All this because a commodity manager “selected” a supplier without any of the basic selection checks.
Identifying and selecting China suppliers are two of the key challenges of sourcing. These steps take method and focus. It is never good to take shortcuts unless you are willing to face major troubles like the the case above.
The very strict minimum set of action to undertake is:
1. Consider enough potential suppliers to provide good comparison of capabilities and pricing
2. Learn as much as possible on suppliers and facilities, including business licence and ISO certificates
3. Have a trusted person visit the factory to evaluate the real status
4. When seller is a trading company, do a very strong reputation check and estimate how open the trader is
5. Never pay more then 20 or 30% down-payment for large amounts. Prefer letter of credit (L/C)
A full supplier evaluation will take more effort and resources and is really advisable for complex products or large amounts. For more information on the full China sourcing process, see 7 steps to make China industrial sourcing successful.