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Buying in China and selling on Amazon – Part 2: Meeting seller performance targets

by Fredrik Grönkvist 

 

Import from China and sell on Amazon.com

In this second part of our series on Buying in China and Selling on Amazon.com, we dissect Amazon’s Seller Performance Targets. Amazon.com use various signals to determine whether a seller is reliable. Sellers failing to meet these targets have their seller privileges removed. Amazon’s official policy also states that sellers who have ever had their seller privileges removed, are not allowed to open new seller accounts. Saying that the stakes are high would be an understatement.

In this article we take Amazon’s Seller Performance Targets one step further. Your success, or failure, in meeting these Seller Performance Targets is directly dependent on how you manage your purchasing strategy – before, during and after production. Without a well laid out importing strategy, your days as an Amazon.com seller are most likely numbered.

What are Amazon’s Seller Performance Targets?

Amazon is looking at three primary signals, as specified below:

”All sellers should be working toward achieving and maintaining a level of customer service that meets the following seller performance targets:

  • Order defect rate: < 1%
  • Pre-fulfilment cancel rate: < 2.5%
  • Late shipment rate: < 4%

Failure to meet these targets may result in the removal of your selling privileges.”

In this article, we explain why you need to implement a comprehensive strategy to meet these targets.

Order defect rate (ODR)

“All Amazon.com sellers should be working toward achieving and maintaining a level of customer service that result in an order defect rate of no more than 1%.”

Amazon.com calculates the number of orders, return due to a cosmetic or functional defect, divided on the total number of orders. All Amazon sellers are requested to ensure that not more than 1% of the total number of products are returned due to defects. If the defect rate exceeds this number, for an unspecified amount of time, you may have your account suspended – temporarily or permanently.

Maintaining a lower than 1% defect rate is not a walk in the park, especially when importing from China and other Asian countries. In China, it’s not uncommon that the defect rate exceeds 2 to 3% when buying from a “reliable supplier”. If you fail to implement a proper Quality Assurance strategy, and make a supplier selection without prior research, you may receive batches with a much higher defect rate. Defect rates of 40 – 60% are not uncommon, and in some cases, the entire batch is defective.

How to avoid shipping a large number of defective items to Amazon

Many importers request their freight forwarders to transport their cargo directly from the Port of Destination, to an Amazon fulfillment warehouse – without passing the importer’s own premises. It saves time, and money. However, as a result the importer is not able to check the items before they are stocked in an Amazon warehouse, and is therefore not able to remove defective items.

If you, at this point, would fail to meet the order defect rate of 1%, you may have your account suspended. This puts huge pressure on the importer to ensure that the ODR is below 1%, before the cargo is shipped from China. Luckily, there are various Quality Inspection companies present in China, ready to send their inspectors to your supplier’s production facility and inspect your products prior to the shipment. At least, this will dramatically decrease your risk of shipping an excessive number of defective units to an Amazon warehouse.

How to avoid defective items in the first place

However, a Quality Inspection is not a way to prevent defects from occurring in the first place. Limiting the number of defects to less than 1% requires both that you first select a “qualified supplier”, and secondly, implement a strict quality assurance procedure.
As you can tell from the name, the purpose of a Quality Assurance procedure is to prevent the defect rate from running up in the first place.

Step #1: Find a qualified supplier

A Quality Assurance procedure is often a useless exercise, if the supplier is unable to comply with your quality requirements, and US product regulations. As a matter of fact, most suppliers in China are not able to manufacture products in compliance with US regulations. Compliance with Consumer Product Safety Commission (CPSC) regulations is required by law, and referred to Amazon’s Sales Terms. Failing to comply with all applicable product regulations will not only result in your account being suspended, but also heavy fines and a forced recalls.

The problem importers face is that most Chinese suppliers are not even aware of US product regulations, such as CPSIA and California Proposition 65. In many industries, not more than 5 – 10% of the Chinese manufacturers and trading companies are, for various reasons, able to comply with American and European product standards, substance and safety regulations. Thus, verifying that a supplier has previously manufactured compliant items is a first, and highly critical, step of your Quality Assurance process.

That is, of course, also assuming that you are already aware of which regulations apply to your product. If not, you need to take a step back and confirm this too, or hire a professional to do this for you. Whatever path you choose, never rely on your supplier to know what standards apply to your products.

Now that you’ve found one or more suppliers able to show previous compliance with all applicable product regulations (e.g. CPSIA), you can start looking into whether the suppliers are able to comply with your quality requirements. All suppliers are not created as equals. In manufacturing, there are technical limitations. Some suppliers are able to reach your quality requirements, while others are not. The only way to verify such capability is by ordering product samples, manufactured according to your product specifications.

Step #2: The Quality Assurance process

Now that you’ve found the right supplier, you can just sit back and watch the money roll in. Not at all. Even if you do manage to find “the right supplier”, you must still implement a strict Quality Assurance process. Chinese suppliers are accustomed to manufacture products according to the buyer’s product specifications. They are not acting as design studios or offer free product development to prospective buyers. Instead, they expect all specifications to be provided by the buyer.

As your product will be manufactured according to these specifications, it’s important that you don’t leave anything out. Nothing is too small or unimportant to be mentioned in your product specification, which at a minimum shall include the following:

  • Design (e.g. 3D design files)
  • Dimensions
  • Dimensional tolerances
  • Materials
  • Components
  • Functions
  • Layout / Artwork

There’s no universal product specification template that is applicable to all products. Obviously, the specification of a wristwatch is entirely different compared to an LED screen specification.

Drafting a comprehensive product specification is only the beginning. As mentioned previously in this article, you need to verify that the supplier is able to comply, by ordering product samples. It’s common that suppliers fail to comply with one or more specifications. Some suppliers get it right after a few revisions, while others are simply not able to comply. If the latter is true, you must move to the next one.

The product specifications, which defines all aspects of your product, shall then be confirmed by the supplier. The best way to do this is by making the supplier sign a Sales Agreement, prior to production. You shall also make the supplier aware of future quality inspections and lab testing, as this shows the supplier that you are able to verify compliance with both product regulations and your own quality requirements. Chinese suppliers are much more likely to comply with your requirements, if they know that they got something to lose by non-compliance.

Pre-fulfillment cancellation rate (In stock rate)

”This is the number of orders cancelled by a seller prior to shipment confirmation divided by the number of orders in the time period of interest. When computing this metric, we consider all order cancellations initiated by the seller for any reason.”

It’s rather frustrating to purchase an item only to have the order cancelled a day or two later, due to the seller’s failure to maintain a sufficient quantity in stock. Maintaining a certain quantity of products may not sound like much of a challenge. It may not be, if you are manufacturing domestically, but buying from China requires serious planning. The target set by Amazon is only 2.5%. One late container shipment could quickly result in in the fulfillment cancellation rate running way beyond the set target. Keep reading, and I’ll explain why importing from China takes months, rather than weeks.

General lead time

What you see on Alibaba.com, and other B2B supplier directories, are not off the shelf items ready to be shipped to customers worldwide by tomorrow. What you see is images of previous products, manufactured by the supplier, for various buyers. These are references, showcasing a supplier’s capability. That said, there are of course wholesalers in China, as in every country, but off shelf products sold wholesale are never manufactured in compliance with CPSC, and other US product regulations. Instead, such products are primarily made for the domestic Chinese market. As a result, buying wholesale is rarely an option, and especially not when concerning electronics, toys and cosmetics.

#1: Production (10 – 50 days)

By the time you make the initial deposit payment, your products are yet to be made. In fact, your supplier is most likely yet to purchase the materials and components, from their subcontractors, used to make your products. Mass production takes anything from 10 to 50 days, depending on the product, its complexity and quantities. Keep in mind that Chinese manufacturers rarely begin production before they’ve received your deposit payment (30%). In most cases, the payment takes 3 – 5 working days before arriving.

#2: Quality Inspections and Lab Testing (2 to 14 days)

After the production is completed, it’s time to send in the Quality Inspector. This will at least cause a delay of one to two working days, assuming everything is fine and there’s no need for remakes or repairs, in which case the shipment could be delayed for another month or two. You may also need to verify that your items are compliant with the applicable product regulations (e.g. California Proposition 65). As of today, compliance cannot be verified on site by a Quality Inspector. Instead, you, or the inspector, must submit batch samples to a product testing laboratory, such as SGS or Bureau Veritas. It usually takes 7 to 12 days, before the test results are back.

Keep in mind that you are not able to move the order forward while the quality and regulatory compliance of your products is verified, as the balance payment (70%) shall be withheld until this is confirmed. If you do pay before this phase is completed, you remove every incentive for the supplier to remake defective items, in case of non-compliance.

#3: Shipping and Customs Clearance (7 to 50 days)

The main factor, related to the shipping time, is naturally the mode of transportation. Air Freight is the fastest way to move your cargo from China to the United States. However, Air Freight is rarely a cost efficient option when importing more than one or two cubic meters of cargo. Instead, you will most likely need to have your cargo shipped by sea. The shipping cost per unit is low, but takes much longer to arrive. The freight time, from Shanghai or Hong Kong, to Los Angeles is roughly 21 days. Add on another 10 to 17 days if you’re shipping to the East Coast.

Then you must also take transit time, in both the Port of Loading in China, and the Port of Destination in the United States, into consideration. Loading, unloading, inspections and customs clearance may take another 3 to 7 days. That’s in each port, so you must multiply this number by two.

In total, you’re looking at 19 to 114 days, counting from the day you place an order, before the products are in stock and ready to be shipped out to customers on Amazon.com. This is assuming that you experience no delays whatsoever.

Potential delays

Talk to any experienced importer, and you’ll quickly realize that delays are more the rule than the exception, when buying from China. Delays are a serious risk that could result in your Amazon seller privileges being removed. Below we look into the most common causes of delay in China.

#1: Quality Issues (10 to 50 days)

Quality issues are the most common, and disastrous, time killer. Quality issues are common in China. Very common, when involving inexperienced importers, failing to implement a comprehensive Quality Assurance process.

There are various types of defects. They may be cosmetic (e. g. Scratches) or functional (e.g. Dead pixels). If your appointed Quality Inspector finds that the defect rate exceeds 1%, the ODR target set by Amazon, your supplier must repair, or remake the products. This process may take anything from a few days, to one or two months, if the defect rate is severe. In case of miscommunication between you and the supplier, the entire batch may be defective, thus forcing the production to start all over again.

Assuming your products would fail to pass compliance lab testing, you are also facing a situation where the production must start over from zero, thus causing huge delays. It’s rarely possible to repair, or by any other means, ”make” a product compliant, as product regulations often refer to certain substances (e.g. Lead, cadmium and phthalates) which cannot be extracted from a finished product.

The only way to reduce your exposure to quality risks is by implementing a strict Quality Assurance process. In many cases, miscommunication between the importer and the supplier is the main cause of quality issues, rather than the supplier attempting to cut corners (although that is not rare either).

#2: Chinese Holidays (10 – 30 days)

The Chinese New Year is a joyful time when migrant workers and white collar workers alike, spend time with their families. For some, it’s the only time of the year to meet and greet family and old friends – sometimes even their own children.

For importers, the Chinese New Year is a time of distress and missed deadlines. I remember my ”first” CNY in 2009. This was actually before I moved to China myself. At the time I was running an online store, selling wristwatches imported from China. All of a sudden my orders were delayed, as the factory, and freight forwarder, ceased their operations for almost a month. As most small businesses importing from China, I failed to plan ahead for this disruption.

Chinese suppliers often stop accepting orders in late December. An order placed in January is most likely not finished until late March, or even April. The Chinese New Year is not the only holiday you should look out for. There are various other minor holidays throughout the year, including the ”National Week”, when all workers are off duty during the first week of October.

#3: Product Development (1 – 12 Months)

Product Development process is always necessary whenever a change is made to a product. Regardless of whether you want to test an entirely new design, or change a color or logo, new samples must be made. Additional tooling may also be required. The supplier may also need to make a few revisions before they get new product samples right. What I’m trying to explain is that product development takes time, and it’s very hard to set a specific deadline.

Changes to your existing designs shall be made separately to the order flow, as you can never be sure whether a new design or modification will take one month, or several, to implement. Many importers attempt to set artificial deadlines, which is often useless. Product development takes time, and as said, never let this interfere with the regular product flow.

Late shipment rate

“This is the number of orders with shipments that are not confirmed by the expected ship date divided by the number of orders in the time period of interest. Orders that are ship-confirmed late may lead to increased customer contacts and negatively impact customer experience.”

The Late shipment rate is related to the order cancellation rate. Amazon is more forgiving when it comes to late shipments, allowing a 4% rate. However, you could rapidly exceed this rate due to delays caused by your Chinese supplier.

Do you have what it takes to sell on Amazon.com?

Feeling a bit overwhelmed? I think you should. Amazon.com is not a charity, it’s a private enterprise. Without strict terms, Amazon.com would quickly lose its reputation as a reputable marketplace. Naturally, that would be disastrous for the thousands of small businesses present on the website.

That said, in return, Amazon.com gives small businesses access to a huge market, both in the United States and abroad. It’s an open platform where anyone that is willing, and motivated enough, can compete. You don’t need to suck up to purchasing managers (many of you know what that’s like) or “know the right people”.

 

Business is always risky. Importing from China, and other Asian countries, is even more so. Instead, you shall adopt a risk management mindset. By implementing our advice in this article, you have already drastically reduced your risks of having your seller privileges removed.


Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/.

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