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How to avoid a sourcing disaster

by Mike Bellamy

Back in 2011, I wrote a blog post called “seconds from sourcing disaster” using the format of the National Geographic channel program called “seconds from disaster.” Today we revisit that blog as the lessons are still applicable today.

The Nat Geo show takes nightmare scenarios like plane crashes and shipwrecks and walks the viewer through the steps leading to an actual disaster. In my blog post I walk the reader through a case study involving how an international buyer let their sourcing project go off the rails.

Unlike the Nat Geo disasters which have complex root causes that only experts can identify, the sourcing disaster I share in this post is very common and with a little bit of experience you too will be able to spot them and avoid them. In writing this blog, I hope to help the reader know what to look for and avoid falling into these common pitfalls.

This very long story made short:

Do your due diligence/audits on potential suppliers BEFORE you send money and make sure you check the quality before the goods ship out of China.

Intro to the full story:

Would you buy a car without taking it for a drive, even if the dealer was well known?

Would you buy a house without taking a tour first, even if the realtor was a famous agency?

Would you have major surgery without getting a second opinion, even if the doctor was from a prestigious hospital?

Yet for some reason far too many buyers place large orders in China without conducting proper due diligenceThey put far too much trust in online directories and fail to do even a minimal amount of due diligence and quality control.

Additional Resources:  Check out www.SupplierBlackList for a user generated list of underperforming suppliers.

Flying yourself to China and spending a few days at the factory is a tiny investment, especially when you weigh it against the cost of a lost deposit, quality failure or missed delivery date. And if you don’t want to fly to China, know that audits can be done by 3rd parties (check out www.SourcingServiceCenter.com) at very affordable rates.

The full story (in Nat Geo’s  Seconds from Disaster Format)

Witness (Purchase Manager): “Everything I am about to tell you we can back up absolutely with emails, photographs and videos.”

Investigator (me): “I have no reason to doubt you. Yours was not the first China Sourcing train to wreck on the rails out of PRC.”
Witness: “I can tell you from firsthand experience the company has virtually no control over the crummy factories they contract with as it turns out. “

Investigator’s notes to self:

Clue #1: “as it turns out” indicates the buyer assumed the vendor was in control but later learned this was not the case.

In China if you “assume” or “hope” things will work out, you have already lost.  Only if you are “sure” something will take place do you have a reasonable chance of it happening.

Probable Mistake #1: Failure to conduct due diligence or a quality audit. I suspect the buyer took the web page and factory sales people at face value when the supplier said they were a professional and experienced company.

Witness: “Even though we went to China to approve the first production sample the entire first container of our product was totally defective.”

Investigator’s notes to self:

I’m sensing some discrepancies in the story. If the entire container was defective, then all parts pulled from the production run were defective, so it is not possible that first production samples were acceptable. I suspect that the buyer THOUGHT they were looking at production samples when in reality they may have approved “golden samples” or prototypes provided by the supplier to ensure the buyer had something good in their hands before placing the order.

Wise move for the buyer to come to China, sad move that they didn’t stick around to confirm that the “so called initial production samples” actually matched what was being produced on the line for their particular order.

Likely Mistake #2: Lack of pre-shipment inspection to confirm that order was to spec as it was being loaded into the container for shipping.

Witness: “The company admitted to the defective product but in the process forced us, under duress, to place another order (twice as large) as a condition to take back the first order. Sadly it was not until the second container had departed and the company had received full payment we were informed the second production run was also defective. This time they had purchased sub-standard parts and did not have the required finish.”

Investigator’s notes to self:

Repeat of Mistake #2: Failure to conduct a pre-containerization inspection.

Additional Mistake #3: Failure to link inspections with payments. The golden rule of China sourcing is to pay your supplier (full or at least partial payment) AFTER inspection has been made on your order.

Witness: “The seller agreed to pay us to repair the defects which entailed taking every unit apart completely to replace the bad parts. They never paid for this work which we are now doing piecemeal to keep up with sales. They also “bought” hundreds of units from us two years ago but never paid for them. They are now attempting to coerce us once again to place yet another order to get the money they owe us which we are absolutely convinced will be defective.”

Investigator’s notes to self:

Train wreck imminent, yet passengers failed to jump off when the chance presented itself.

Witness: “To make matters worse while all this was going on we also had paid the company a huge deposit for tooling our commercial version of the product. The 10 production samples they sent us in time for a major show were worthless and broken. We found out later the supplier the company found was one they had never worked with in the past.”

Investigator’s notes to self:

Appears the buyer was dealing with a trading company rather than actual manufacturer. Trading company probably has a great marketing message and price, but no actual experience and little control over the manufacturer. The blind leading the blind, resulting from Mistake #1: failure to research your suppliers and verify their ability.

Witness: “When asked why the company would send garbage knowing they were no good the answer was “to make the deadline.”

Investigator’s notes to self:

Ramification of Mistake #3- not linking payment to inspections. Factory was incentivized to ship on time in order to get paid, rather than focused on “shipping products TO SPEC on time”.

Witness: “They owe us big money which they admit to in writing. Yet now in the latest email from the company representative she now states we never told them there were any problems until “months or years later.” We spent 3 days writing a reply to state agreed dates and specific emails to demonstrate this is a BIG lie.”

Investigator’s notes to self:

Missed Opportunity. Buyer should have launched legal action (at least a demand letter) (ask the author if you need an introduction to a lawyer in China to issue demand letters). Instinct tells me the supplier knows they are wrong and is throwing every last ditch excuse in hopes of getting the buyer to spend even more money.

Or perhaps the factory is using the time to liquidate their assets in case a lawsuit does come down.

Scenario is reminiscent of the old “guess which cup the ball is under” scam. The mark keeps paying round after round but never gets it right because the ball was removed from the cups when the victim wasn’t looking. In this China sourcing case study, the buyer keeps putting good money after bad and the supplier may have no plans to actually ship quality product.

Witness: “I‘ll finish with one last example of the fraudulent nature of the company’s business practices. Our Netherlands distributor placed an order for 100 units which were shipped directly from the company. After the order was in transit we received an email from the company’s representative stating there was a problem and a tool was being made that would be required to repair each unit. She suggested we wait until the distributor took delivery before telling him we shipped him defective units. Needless to say we had similar issues caused by the company with all of our overseas distributors.”

Investigator: “I can’t say I didn’t see that coming.”
Witness: “As I stated, all of this is well documented and we are now seeking to discover what recourse we have to get our money back. If all else fails I may choose to put together a book proposal for my literary agent who is based in NY, to circulate to publishers. A good title might be THE GREAT CHINA RIP-OFF.

Investigator: “A book may help you vent your frustration, but it is not going to get your money back. Assuming you have proper contracts and a clear payment trail to the vendor, don’t rule out legal action. There are plenty of English speaking local lawyers based in China, and just like factory labor is lower than back home, luckily so are attorney fees. But before you engage a legal team, I would suggest the following:

a) Hire an investigation firm to find out if the company you want to sue actually has any assets lawyers can sink their teeth into.

b) DON’T let your supplier know you are preparing a case. This will most likely not scare them, but rather give them time to prepare and perhaps hide assets.

Believe it or not, the China legal system has come a long way, and a foreigner can get a fair shake in the courts assuming you have signed contracts and well documented order details.”

Witness: “Yes, if we choose to investigate you will hear stories from the company’s representative that our product is no good and is too hard to manufacture. “

Investigator: “Sounds like they have already started to prepare their defense.”

Witness: “Check out our website. Our product won an award and has been endorsed by industry pros. Ours is a great product that ended up in the hands of unethical amateurs not skilled in the manufacturing process and went for the cheap out of spec materials to make more money disregarding and interfering with our brand building process. “

Investigator’s notes to self:

Why would such a professional company let themselves do business in the first place with a sloppy supplier? The answer to this question will expose the root cause of this sourcing train wreck. By selecting the wrong partners in the first place, the buyer began a sequence of events that was more likely than not to end in the project’s demise.

 Summary of lessons from the case study:

1. If you are going to use a trading company or broker rather than going factory direct, make sure they have excellent reputation and track record of success.

2. Link payments to performance/ inspections.

3. Do multiple inspections at various key phases of production.

4. Finding the right supplier in the first place is the best way to avoid drama in the long run.


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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