Getting Started: A Guide to Effective Sourcing


Published on

Thanks to the sickly global economy and the resulting corporate deleveraging and pressures to reduce costs, many companies have increasingly turned to locating new sourcing opportunities overseas. The decision to either outsource production or seek new suppliers is a strategic one. But very often it is not given the strategic importance that it requires. Before anyone begins to outsource, they should have a clear outsourcing strategy.
We have often been asked by clients whether we had any good advice as to how they should effectively implement a sourcing strategy. What follows is a brief guide that outlines a process we employ and that we encourage our clients to follow when seeking new manufacturing sources for their products. It is not all encompassing and is not intended to be a failsafe recipe for effective sourcing. The key, as with most initiatives, is in the implementation. However, it will provide a basic process that, when followed, will significantly improve your chances of having a successful sourcing experience.

Published in: Business, Lifestyle
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Getting Started: A Guide to Effective Sourcing

  1. 1. Getting Started:Sertus Guide to Effective Sourcing A China Perspective in t f
  2. 2. Getting Started: Sertus’ Guide to Effective Sourcing A China PerspectiveThanks to the sickly global economy and the resulting corporate deleveraging andpressures to reduce costs, many companies have increasingly turned to locating newsourcing opportunities overseas. The decision to either outsource production or seek newsuppliers is a strategic one. But very often it is not given the strategic importance that itrequires. Before anyone begins to outsource, they should have a clear outsourcingstrategy.We have often been asked by clients whether we had any good advice as to how theyshould effectively implement a sourcing strategy. What follows is a brief guide that outlinesa process we employ and that we encourage our clients to follow when seeking newmanufacturing sources for their products. It is not all encompassing and is not intended tobe a failsafe recipe for effective sourcing. The key, as with most initiatives, is in theimplementation. However, it will provide a basic process that, when followed, willsignificantly improve your chances of having a successful sourcing experience.About USSertus is a leading provider of value-added procurement and logistics services. We offer our partners product,inventory management, logistics and custom-made solutions to meet real client needs. With bridges to thousands offactories, Sertus is able to help our partners build profitable brands by sourcing the best products while minimizingcosts. We also offer our partners access to certain well known, international brands that are part of the Sertus portfolio.Our offices in the US, Canada, China, and Latin America work together to find the best sourcing alternative for all of thecritical components and processes in the supply chain. Sertus backs its geographic scope with a full range of servicesincluding: product design, product development, procurement management, purchasing management, manufacturingcontrol, forwarder consolidation, shipping control, customs clearance, local forwarding consolidation and so muchmore. Unlike most trading companies that intermediate a buyer and a manufacturer, Sertus provides comprehensiveturnkey services that cover every need of sourcing. in t f
  3. 3. Define and Understand Your Needs Before attempting to source anything, it is essential that you have spent some time thinking through your needs. It can mean the difference between success and failure. Needs form the raw materials from which we build sourcing goals, which in turn make up the yardstick by which we measure the attractiveness of the offers we receive. It is the ability of the supplier to deliver against his proposal and your needs that will determine success or failure. Therefore, it is critically important. Without a clear understanding of needs, the probability is heavily skewed toward a process that runs its course along the path of least resistance. As Elbert Hubbard said, it is the path of least resistance that makes rivers run crooked. Worse yet, a miscalculation of needs runs the river in the wrong direction! So take the time up front to understand as much as possible about your needs to put yourself in the best position to reach a successful conclusion to your sourcing initiative(s). The purpose of a needs assessment is to answer the questions: who, what, why, when and how. 1. Who is your customer? Perform an environmental scan. Think about the context into which you will be selling your product. Conduct a target population analysis to learn as much as possible about those people who will be using your product. What do they have in common? What is the problem the customer looks to solve with your product? Who is your competition and what do they offer your customer that’s unique or different. 2. What is it that I want to source? Based on real customer needs and your unique selling proposition, what is it specifically that I need? Conduct a “needs versus wants” analysis to understand the critical elements that are essential to being able to deliver your unique selling proposition. Identify thespecific differentiators between your product and those offered by your competition.3. Why am I looking to source this product from overseas? Try to tie the response to a specific business need and be surethat the perceived benefits you seek in sourcing the product offshore will be greater than the implied costs of alternatives(whether that alternative is the same product sourced locally or whether thealternative is to not source it at all). Be sure to contemplate both real andpotentially hidden costs in your analysis.4. When do I need the product? Identify the specific inventory requirements thatwill be needed to meet sales projections and determine when you will needgoods to be delivered to your facilities or designated destination.5. How should my sourcing request be managed? Set a timeline and criticalmilestones and try and stick to your schedule. Conduct a task analysis tounderstand the best way to manage your request for proposals, review ofquotes, receipt of samples, selection criteria, etc.Not all five questions must be answered as part of a needs assessment process.But this list gives you a good example of where to begin. If you are able todefine clearly the answers to these five questions, then you should be in a goodposition to communicate your needs to your potential suppliers. in t f
  4. 4. Define Your PrioritiesWhen people are asked to define their priorities as it relates to theirsourcing initiative, we usually hear – “We want the best possiblequality for the best possible price and we need it delivered yesterday.”This is not a prioritization, but a wish list. Unfortunately, wheneverything is a priority, nothing is a priority!There is a great story that illustrates this point well. A man, whiledriving his regular route to work, noticed a car sitting at the far end of adriveway, with its nose edging out ever so slightly onto the street. Thefirst day he passed, he did so with caution as he assumed someonewas trying to see whether it was safe to pull out. But as he drove past he noticed that the car was empty. For severaldays he noticed the car in the same position, still empty. One day, as he passed, he happened to look at the car just as he went by, and noticed a FOR SALE sign taped just below the front grill. The sign was hardly visible to anyone driving by unless they made an effort to look at the vehicle closely, taking their eyes off the road, just as they passed in front of the parked car. Why would they put the sign there? The answer was simply that they had only one sign, and they wanted to advertise to people traveling both directions, so they compromised and put it on the front of the car. What they evidently did not consider was that in reaching this compromise, they made it so the sign could not been seen by anyone at all. Both directions were a priority, so neither direction was a priority.There are many methodologies to defining and organizing priorities. It is a matter of personal preference, but the endresult is the same. The methodology below is one we prefer because of its simplicity.Must Have / Should Have / Nice to HaveMust Have: These are the absolutely critical specifications, criteria or other goals that MUST be included with any offeryou receive. You will define your ultimate success based on the content you write down here. Make sure to prioritizewithin this category from most important to least important within the category.Should Have: These would include all goals that should be achieved (but not essential) to determine whether the effortwas successful or not. Prioritize the “Should Haves” as well if possible. These will help you differentiate between oneoffer and another in the event two solutions meet on an equal basis all Must Have priorities.Nice to Have: Anything else that you would like to see included but clearly not going to define whether you weresuccessful or not nor will they be used to sway your decision from one supplier to another except as a tiebreaker.Remember that priorities may change. It can be helpful to note why a priority is rated high or low, especially if we knowthat there are temporary influences at work that will change in the future. You may have a short lead time of less than30 days because you are out of inventory, but are aware that with proper planning this can be addressed goingforward. Hence short lead time will be less of a priority in the future. in t f
  5. 5. Determine the Optimal Location of ProductionNow that you have defined clearly your needs and priorities, it is time to figure outwhere the optimal location of production will be for your product. Typically,products associated with high labor costs and/or that are purchased in largequantities make the best products to source from China or any other low wagecountry. Low run or one-off items do not lend themselves well to Chinesemanufacturing. Products where short lead times are required are also usually notwell suited for international sourcing due to freight considerations (note:production times themselves can also be longer in China due to a wide array offactors including energy shortages, working capital constraints, efficiencydifferences, etc.). There are exceptions to this rule, especially for items that canbe shipped via airfreight while maintaining sufficient profitability.China’s Low (But Rising) WagesAlthough wage and benefit increases of 15 to 20 percent per year have been rapidly eroding the Chinese labor-cost advantage,China continues to be the manufacturer of the world. It is true that the productivity gains realized in China (while significantcompared to other countries) are well below the labor cost increases seen recently and therefore competitiveness will wane aswe move into the next decade, ceteris paribus. However, cost advantages in our opinion are more greatly threatened by otherexpenses, including: electricity costs, bunker fuel costs and related freight expense, land/rent, supply chain risks and theexpenses needed to control these appropriately. But even in light of these challenges, there are strong reasons to believe Chinawill remain a manufacturing powerhouse with significant cost advantages.For one, China holds several material comparative advantages over other low-wage countries in the region (e.g. Cambodia,Vietnam, Indonesia, and Thailand) , including: the largest labor force in the world, superior talent pool, better infrastructure, moredeveloped supply networks and higher worker productivity. While labor rates are lower in these alternative markets, the Chineseadvantages listed above mitigate most if not all of the savings from lower wages (not to mention that wages are rising veryquickly in these other Asian countries as well).But possibly most important, China continues to be an export led economy. What does this mean? Simply put, China will notcease from utilizing every tool in its tool bag, including financial and fiscal incentives, to support its export sector. Outrightgovernment subsidies and direct manipulation in the fx market to maintain the reminbi artificially weak will continue and China willremain a competitive alternative for your manufacturing needs (especially those that have a high labor component) for some timeto come.The Critical DecisionIf China continues to be the low cost alternative, then what are the determining factors that will shape your sourcing strategy as itrelates to location of production? Review your priorities and weigh these against the benefits and challenges highlighted above.Is a short lead time a priority? Is it more important than low cost? If so, then you may want to consider near-shore alternatives(like Mexico to serve North America or Central/Eastern Europe to serve Western Europe). Try and build a shortlist based on yourpriorities and what you can learn about the manufacturing base in those countries. Are you searching for low cost apparel orshoes? Then maybe you want to look in Thailand, Indonesia or Vietnam. But if you are located in Western Europe and areconcerned with a quick lead time due to fashion’s fickle trend shifts, then perhaps Turkey is a better option. It may be difficult to determine the ideal location of production without knowing how suppliers in that location will address your other priorities (e.g. cost, adherence to critical specifications, etc.) or what in fact the production lead time will be (as this can vary not only from market to market but also from supplier to supplier within the same market). Therefore, make an effort to eliminate locations that will simply not work. If you know you need your product in 30 days, China is not going to work for you (unless you can afford to airfreight your product – and even then you are looking at an exceptionally quick production turnaround). This process involves research. It can take time and doesn’t need to be perfect. But it will save you a lot of time later on (far more than what you invest at this stage) if you can narrow down your search. in t f
  6. 6. Prepare Your Request for Quote (RFQ) You have now assessed your needs, you have defined your priorities, and you have explored location of production benefits and limitations. At this point it is time to prepare your request for quote. To start, gather all of the information that you will include in your RFQ and that you will want to share with prospective suppliers (see note below on intellectual property): product photos, critical specifications, packaging requirements, branding, color schemes, certifications, delivery terms, required lead times, required payment terms, product liability insurance requirements, customs requirements, special markings, etc. If youhave a spec (or data) sheet for the product, you can attach this to the RFQ. The same would hold true for a bill ofmaterials as well.We strongly suggest building a template that you will use for all RFQs. The benefits of a template are numerous, butmostly it will standardize this stage of the sourcing process, helping you to ensure that your requests arecomprehensive and consistent. You are going to need to check back all quotes received against your RFQ, making iteasier if the relevant information is noted in the same place on all requests.Quantities will obviously affect the pricing you receive. Therefore, it is imperative that you provide the prospectivesuppliers with your anticipated purchase quantities. We favor breaking this down as a first order quantity and ongoingorder quantities (this could be expressed as weekly, monthly, quarterly, or annual volumes, depending on thefrequency of your anticipated orders). Make sure to request that the supplier also offer you their minimum orderquantities (MOQs).We highly recommend that you also specify a timeline – when you need the quotes returned and when you will bedetermining the winning bid. You may also wish to share your priorities with your prospective suppliers as well – you will evaluate the quotes you receive.Finally, include a list of contacts that will be available to clarify any questions regarding the RFQ. It is not uncommon tohave separate contacts for specific disciplines; for example, one contact for technical questions and another formarketing questions. Your supplier should know how to respond and to whom they should send their final quote.For additional information, please refer to our white paper, How to Structure an Effective Request For Quote.A note on intellectual property rights (IPR) in China: Even though China hasstrengthened its legal framework and IPR laws and regulations as required by itsentry into the WTO, it continues to be a haven for pirates and counterfeiters. Itstill boasts one of the highest piracy rates in the world. If it sells well, it is likelyto be illegally copied. While China is a party to international agreements toprotect intellectual property (including WIPO, Bern Convention, ParisConvention, among others), companies must still register its patents andtrademarks with the appropriate Chinese agencies and authorities for thoserights to be enforceable in China. Copyrights do not need to be registered butregistration may be helpful in enforcement actions. As a result, if you are lookingto manufacture a new, innovative or unique product in China and are concernedabout piracy, then we highly suggest you seek professional assistance beforesending out your RFQs to a bunch of factories (sight unseen). There are plentyof companies, Sertus included, that can help you to manage your RFQ process,while protecting your rights by putting you in a legally sound position before youshare your intellectual property as part of the sourcing process. in t f
  7. 7. Identify and Shortlist Potential Suppliers You are now ready to distribute your RFQ but don’t know where to send it. You have researched the attractiveness of certain locations of production (or at least have discarded some alternatives), but you are not sure, within the markets you have identified, who to contact. Factory Direct or Trading Company The next critical decision you need to make is whether you want to go factory direct or whether you will be using an agent or trading company to help you. There are pro’s and con’s to each approach. A good agent, in simplest terms, needs to be adding value to your supply chain for it to make sense. Clearly, anyone getting in the middle of your trade will be charging you for the work that they do. They key is to makesure that you are getting good value for what you are giving up (i.e. the fees they will charge are really worth the servicesthey provide).There are some cases where a local agent will actually be in a better position to obtain more competitive pricing than youwill get by going direct. Some Chinese factories prefer to deal with a local, someone that they know and have developeda long-standing relationship with (referred to as guanxi in Chinese), than to sell to an overseas buyer. Furthermore, thereare many highly qualified Chinese factories that are not set up with an export license and therefore will need to liquidatethe transaction in local currency. A trading company or agent is in the best position to handle this for you.Some trading companies also have certain product expertise and may have scale economies that they can pass along toyou such that your price is either improved or at least the same as it would be if you go direct, yet you have the additionalassurances and value being provided by your agent.Complexity is possibly the best reason to use an agent or trading company. If you will need to source a number ofproducts from different manufacturers (such as components that need to be assembled, packaged, etc. or individual itemsthat will conform an entire line) then you are better off using a trading company with packaging and assembly capabilities.Similarly, when working with multiple factories, you may need someone to oversee all production schedules to ensure thateverything arrives on time, are checked against your quality assurance standards, and consolidated per your instructions.In this instance, a good trading company that has been pre-qualified by you is probably your best option.Many of our largest clients are big box retailers who have significant operations in China. However, given the complexityof their business and the lines that we manage for them, they prefer to use a single independent entity to handle allpurchasing, quality assurance / control, assembly and packaging, such that their private labels are branded consistentlyacross the line. Walmart and Target are good examples of these types of clients. The ease of dealing with one accountrepresentative that can handle everything, when the purchases are complex in nature, is a very strong argument for usingan agent when sourcing from China.A good agent can be invaluable, but finding the right partner can be a challenge. There are hundreds of small tradingcompanies that are set up to literally intermediate a transaction but add very little (if any) value. We refer to these entitiesas “middlemen.” They operate with a severely limited or no infrastructure; and add hardly any value to your transactions,acting as a matchmaker but with a nice margin built into the trade. in t f
  8. 8. Therefore, when looking for an agent, it is very important to find a reputable company that has a good infrastructure, deeplocal relationships, and sound market knowledge. Your best bet is to find one that is a US or European based companywith wholly owned Chinese operations that are managed by Westerners and staffed with locals. This addresses theconcerns of having someone with local expertise, but provides the comforts of dealing with an entity that is incorporated ina developed market, speaks your language (and can bridge communication seamlessly), and offers greater legal protectionto you as a buyer.If you are looking to put together a simple, single item order that can be sourced from one factory and you plan on orderingfull container load (FCL) quantities, we almost always recommend that our clients go direct. Many of these customer typeshave hired us to help source a reliable factory and to oversee production to ensure on-time delivery and quality control.Our services are billed out as they are used (or bundled for repeat orders/transactions, offering volume discounts for theseclients), which has given birth to a “middle ground” that can be used by buyers when sourcing from abroad.The middle ground, which is often overlooked, is to utilize a local partner to help you “manage” your factory direct orders.Here, your local partner is not taking any proprietary position in the product you are buying (as we do in our tradingbusiness), but rather charging you strictly for the services you need. Many of our clients are moving toward this model andhave found they are able to capture many of the benefits of going direct to manufacturers (i.e. establishing a directrelationship and clear lines of communication with the maker), while being able to benefit from the value added by a local,on-the-ground independent partner that will act as their eyes and ears. For almost all our Agency Services customers, wehave been able to add value to numerous points along the supply chain, whether this be in improving negotiated terms andconditions, or assisting with production management, quality assurance training and protocol implementation, qualitycontrol inspections, offshore inventory management or assistance in other production or logistics areas. These areextremely valuable services that should be considered when looking to source from China or anywhere else off-shore forthat matter.How to Find ManufacturersChina has thousands of factories that are churning out the world’s products every day. The hard part really isn’t finding afactory – it’s finding the right factory for what you need. The most common way (and certainly the easiest) is to tap theinternet. There are a number of sites and directories that you can use, including the three largest: Global Sources(, Alibaba ( and Made-in-China ( While you will mostcertainly find a number of supplier alternatives on these sites, you have not solved the problem of qualifying these entities.Many may not even be manufacturers at all or worse yet, might be looking to swindle you out of your money.How can you verify whether a supplier is indeed real, is a true manufacturer, and is a good fit with your needs? There are anumber of companies that you can hire to perform a background check on the factory. Yet just because some third partyhas “verified” a supplier, does not mean it is truly a good fit and there is no guarantee for the accuracy of the informationyou are provided.You may also check with your local government. For example, the U.S.government will help US businesses in verifying Chinese company information.This can be done on-line ( or you cancontact the Commercial Service Dept. at the US Embassy in Beijing. However,the depth and breadth of information you will receive is not really enough to allowyou to move forward with confidence. It is certainly better than nothing and a goodplace to start. But to get relevant and detailed information that pertains to yourparticular needs, you are best served by finding a company that can perform afactory evaluation for you, but that you intend to keep involved in the process. Acompany that manages transactional exchanges, selling one-off backgroundchecks, is less likely to work with you to understand all of your needs and performa relevant and comprehensive evaluation than is a company that will be involvedin helping you manage the order from start to finish (or some form of involvementalong the chain). in t f
  9. 9. Qualify BidsYou have shortlisted your suppliers, sent out yourRFQs and are now beginning to receive quotesfrom the various entities that you contacted. Thefirst thing you should be doing as you begin toreceive the bids is to check them against yourRFQ to make sure all specifications, priorities,etc. have been addressed and are quotedaccurately. Make sure the quotes are clear andthat any ambiguity is resolved before youcompare and contrast the bids received.Create a scorecard that you can use to record all quotes as you receive them. You may wish to assign arating to each category (as defined by the priorities that you defined previously) and grade each supplier’squote on a scale of 1 to 5 in each of the categories on the scorecard. Scores can be weighted dependingon the importance of each priority and the totals can be compared in order to get a general idea of whereeach offer ranks. Unfortunately, selection of a supplier is not a scientific process. Therefore, you need to have a good qualitative understanding of the pros and cons of each offer as you make your comparisons. Once you have narrowed your list, you should ask each of the candidates to provide you with a sample for review. This is extremely important as it will allow you to verify the spec noted in the quote sheet. There have been far too many times where a price that was too good to be true in actuality turned out to be for a product that was entirely different than the spec noted in the quote sheet. In the words of Ronald Reagan, “Trust but Verify.” in t f
  10. 10. Meet Your FinalistsBusiness in many cultures (China especially) is nottransactional as it is in many Western cultures. It isrelationship based. Once you have selected yourfinalists you need to meet them face-to-face. If you aregoing to use an agent, a face-to-face meeting is alsorecommended (and this is another reason why tradingcompanies that are incorporated close to home cansave you a long trip out of the gate).One of the most effective ways of meeting suppliers isto schedule a trip to a trade show where you can meetseveral factories all in a single location. This will save you time and significant expense.Find out from the suppliers you have selected as your finalists what shows they will attend and you may get luckyand be able to meet the majority at the same show. Make sure to contact all of your finalists attending a showbeforehand and set up appointments with them for private meetings as well as scheduling a factory tour (especially ifthey are somewhat close to the event locale). Check to see who will be attending the show from the factory. It isvery important that you develop relationships with not only the sales staff (who are most likely the people who havebeen in contact with you thus far) but also with plant managers and ultimately the owners.If you do attend a show, do not expect to do much more than meet some of the staff and see a good cross section ofthe product they are selling. Most new and innovative product is not displayed at trade shows (especially in Chinawhere there is a high level of paranoia, and for good reason, that innovation will be stolen if showcased).Furthermore, many of the people who are manning the booths are often temps or hired help for the show and havelimited knowledge of the product. Don’t rely on promises or pricing offered at shows either as they are often thrown out as bait to generate as much traffic or leads as possible. The true pricing will be negotiated later. If you are thinking about using a trading company or agent in some capacity to help you with your purchases, it is a good idea to get them involved in the process as early as possible. One of the services we offer to our prospects and clients is to walk shows with them and help not only with translations, but also with setting up appointments with qualified factories, organizing and scheduling booth visits, and offering technical and product specific help as needed to facilitate the sourcing process. in t f
  11. 11. Negotiate Price / Terms At this point your initial shortlist has been narrowed to your finalists, you have hopefully met most of your prospects and you have possibly eliminated a few. The list is now significantly smaller than it was when you started. You should have a good feel for the capabilities of each of the factories you have visited. Now is the time to begin your pricingand terms negotiations. You should have a good idea as to where the market is and therefore youmay have a strong preference for one particular factory based on price and for another based on someof your other priorities. Ideally, you might be able to get the more expensive factory down to a pointwhere it would make your decision an easier one.All factories will negotiate to some level. But asking for huge concessions will usually not work. Berealistic in your negotiations and understand you are developing a relationship that is one that needsto be nurtured.Negotiating terms can be difficult as many factories simply do not have the capital to be offering newclients financing or eliminating down payment requirements. This is where a trading company oragent can help. Effective intermediaries have existing relationships with these suppliers or at aminimum are in a better position to help build guanxi and negotiate more favorable financing terms.Factories selling to a local are more apt to offer concessions when it comes to down payments orfinancing than when selling to a foreigner.Negotiations with several factories is wise aswe highly recommend having at least oneback up supplier for your products in theevent something happens to your preferredsupplier. We often manage orders atmultiple factories for the products wemanage for exactly this reason – we want tomaintain relationships with several factoriesfor a given product. This is especially true ifthe factories operate in different regions. It issimply a risk diversification strategy that weemploy often. in t f
  12. 12. Define Production and QC Strategy Your pricing and terms negotiated, an important question you need to consider is: “How am I going to ensure that my products are produced according to the lead timesoffered by the factory and how will I ensure that what they deliver is going to be as per my order?”The answer to the question will depend to a large degree on the nature of the product and the type of factoryyou selected. However, you want to make sure that spec is adhered to and that lead times are met. From adistance, it is highly difficult to manage. This is where a local agent can add significant value in helping tomonitor production, providing you with regular updates, in-line inspections, final inspections and productionsamples selected at random from the final production lot for you to review before shipping.Most critical during this stage is to thoroughly understand the production process of your supplier (this doesnot need to be at a highly technical level, but you should understand the critical stages in production and thetime for each). Define key milestones that you want to monitor. If raw materials and the quality being used isimportant, then you should possibly schedule an inspection of raw materials for your initial orders to makesure that the quality is as you require. In short, you need to develop a production management strategy thatcan be agreed in principle with the manufacturer prior to entering into a contract.There are many companies that have experience in quality control and production management. But whatyou often find is that these companies will only do what you ask of them. The QC protocols they set up arebased strictly on what you ask them to review. Therefore, if you happened to not mention that you would likeall of your master cartons closed before the goods are loaded onto the container, they simply will not check forthis (nor tell you – we have seen this first hand). More importantly, when problems arise, the usual responseis to highlight the exception but offer noresolution. Therefore, you are left trying tomanage a crisis directly with the factory fromthousands of miles away. Understanding theroot cause of the problem, implementingcontaining actions, defining with the factoryand overseeing the corrective actions as wellas working through preventative actions tokeep the problem from reoccurring are whathigh value added agents will offer you. in t f
  13. 13. Place Order(s) / ContractYou have your price, negotiated terms, andhave defined a production management andquality control strategy and are now ready toplace your order. It is critical that all of the keyspecifications and terms negotiated are clearlydocuments in your purchase order. Youshould have everything issued in the locallanguage and under local laws. Therefore, ifplacing the order with a Chinese factory, makesure your contract is written in Chinese andhas been run by Chinese council (unless youare placing orders via a US trading company with local operations in the country where your order willbe manufactured). In some countries, having the contract in local language and under local law is notas critical. However, it is highly recommended and in certain countries (like China) it is essential.You contract should be clear and concise. If you can arrange for penalties to be imposed for latedelivery, it is also recommended that you try and include this. However, many factories in China will notagree to such terms. It is also an unfortunate fact that those that do agree are usually the ones thatare always on time – they don’t have any problem agreeing to these terms because they know they arerun efficiently and will meet the timeline you have laid out. It is the ones that won’t agree that weusually need to worry about.For contracts signed in China, make sure they are “chopped” by the factory. A “chop” is a stamp/sealthat is placed onto the contract. All legally registered companies in China are required to have at leasta company official chop. The company chop is required on all official documents such as contracts, memos, bank account applications and labor contracts. Technically, anyone who is in possession of the company chop can legally bind the company and therefore the management of this chop is extra important. The local Public Security Bureau (PSB) will issue the company official chop upon successful company registration with the Administration of Industry and Commerce. The PSB will then keep a specimen of the company’s chop for verification in case of dispute or suspected fraud. You can check with the PSB in the event you suspect foul play and verify that the contract being signed is in fact official. in t f
  14. 14. Production Managementand InspectionsOnce your order is placed, stay involved.Understand the production process and whatneeds to happen in order to get your productfrom order to delivery. In defining yourProduction and QC Strategy, you highlighted thekey milestones that need to be reviewed duringproduction. Monitor how the factory is adhering to these milestones and pay particular attention to thegaps. Large gaps could indicate a potential problem that you will want to address immediately.Regular contact with the factory or your agent is highly important. You will want to pick up on delays assoon as they become evident (although this is very difficult to do from overseas). If you can manage it,you should plan to visit the factory during production of your goods to verify that product is being madeaccording to your specifications and as contracted in your order.When the order is finished, you should insist on a production sample for your review. As we mentionedearlier, this is far better managed by a third party if you are not able to do it in person (either for logisticalreasons or it isn’t cost effective). Your inspections should be managed according to a recognizedinspection standard. We use the MIL-STD-105E (military standard) although The American Society forQuality (ASQ) publishes a book that defines and explains the "Zero Acceptance Number SamplingPlans,” which is another acceptable approach to quality control. The important point to remember is that ongoing involvement is a big part of building your relationship with the supplier. Getting your supplier to understand your standards and requirements and holding them to those standards will eventually get the factory to self-regulate, which will save more time and expense down the road. Involvement is the key, as an involved customer we usually find is a happy customer. in t f
  15. 15. Shipping Your ProductsYour product is ready to ship, it has passedinspection and is ready to be picked up fromthe factory. To manage the shipment to yourhome country you will need a capable freightforwarder – the last key piece to the puzzle.There are many to choose from and they allhave offices (or affiliates) in every major cityacross the globe. Setting up a meeting with aforwarder that has offices near you is simpleand they can actually provide you with goodinformation via their overseas offices that operate in the country you will be manufacturing your product.We actually recommend contacting the freight forwarder far earlier in the process for this very reason.You should look for a forwarder that runs a large operation in the country where you will be sourcing yourproduct. This entails not only an ability to arrange freight, but also logistics, warehousing, and possiblyother services as well. These companies will likely be the most use as they will tend to have a broaderrange of contacts in those markets. Some of the larger forwarders include: Expiditors(, BDP (, Schenker ( andPhoenix International ( But there are literally hundreds that you could select from. Many trading companies and agents will have extensive relationships with freight forwarders and can pass along savings if you are working with a good intermediary that manages a good volume of export business. Managing the shipping and logistics of your delivery is the subject really of another guide. However, the critical point is that you need to have in your corner a solid freight forwarder to help you smooth out the bumps and manage your shipments for you seamlessly. in t f
  16. 16. Review and ImproveOur final and concluding piece of advice inmanaging a sourcing initiative overseas is to findtime, after everything is done and before you areready to place a repeat order, to review the processand look for a few key things you can improve.Continuous improvement is a noble goal for anybusiness and when dealing with overseas suppliers,and the complexities that this involves, there will beproblems at worst and inefficiencies at best. Take some time to review what worked welland what didn’t and try and address a couple of the “not-so-efficient” moments by makingsome adjustments. Rate your overall experience and how well you met your priorities that you set out at the beginning of the process. Were there any risks that you identified and that need to be more appropriately addressed? Ask yourself to find two ways to make the process better the next time around.SummaryAs noted earlier, this information is not meant to be exhaustive. Sourcing is a dynamic andcomplex activity that requires cultural and practical experience. Good organization and theselection of your suppliers and local partners are ultimately what will make the greatest impacton assuring quality and avoiding problems. Hopefully, the process we have outlined in thisguide will help you to define and execute your sourcing strategy in a manner that will lead topositive interactions and more importantly a successful outcome. For more information on successful sourcing from China and for help with China supply chain solutions, contact us at or visit us online at Some of our clients include... in t f