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The dangers of letting the wrong party select your suppliers

by Mike Bellamy in the book "The Essential Reference Guide to China Sourcing"

Some trading companies and sourcing agents will offer to conduct the initial supplier identification for free. However, while it sounds the most attractive at first, nothing is done for free in China!

Quite often, the “for free” model is the most expensive in the long run. As outlined earlier in the book, supplier identification is an intense and lengthy process to narrow from 100s of factories down to the top candidates. If somebody offers to “do it for free” this is what may be really happening:

  • They will decide which sub-suppliers to use. That means they may select the supplier which is best for them, not best for you; perhaps where they have a relative, kickback or commission. In effect, the buyer is getting steered towards a supplier which may not be the best match for the buyer’s specific requirements.
  • "You get what you pay for". They do not plan to conduct in-depth research on a national level. If someone is providing research for free, they may not be as conscientious about understanding your goals and helping to find the right supplier. Keep in mind that finding the right supplier is the single most important factor in determining if your project will succeed or fail.
  • They plan to cover the internal costs of the initial research by charging you an inflated per-unit cost once production starts. In the long run, the buyer pays too much.

Insider Tip: If your “partner” is unwilling to state the name of the sub-suppliers and give the pricing points, then you are certainly paying too much. Furthermore, if they do not disclose the actual manufacturer, then you have no way to validate the quality process in place and you have lost control over who has access to your intellectual property.

Unfortunately, even if you pay a company in China to conduct this supplier research you cannot automatically assume they are looking out for your best interests. It is common in China for trading companies to milk both ends, in other words charge the buyer for a research fee or commission while getting a kick back or other commission from the supplier. Therefore, you must perform due diligence on your research partners as well.

Unlike the medical and legal professions, there is no agreed code of ethics, standards or a governing body for sourcing agents in China or the US for that matter. When considering a research partner in China, make sure you ask about ownership, compensation structure, and client references, non-compete clauses, research methodology, full disclosure of sub-supplier pricing and identity, company history, warranty terms and the plan for protecting your intellectual property. Should you pay for research in China, make sure you have such a contract in place. If your “partner” is doing the research for free without a formal contract in place, then they are not obligated to do a professional job.

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. He is also the author of "The Essential Reference Guide to China Sourcing" and founder of PassageMaker Sourcing Solutions.

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