Finally, you’ve received your goods from China. Apart from a few defective units, everything is just fine. Congratulations, you’ve made it. You’ve achieved something most small businesses will never do – establishing a successful relationship with a Chinese supplier. It can be a game changer for your business. With the right Chinese supplier, you might be able to bring in handsome profits for years to come. It might even give you the upper hand on the market. Now that’s certainly something that shouldn’t go to waste. Let’s look into how you can maintain your supplier relationship – beyond your first order.
Advice #1: Don’t be lured into switching to a “cheaper” supplier
Everything seems fine until one day when you receive an email from a supplier quoting a price, that’s way below what your current supplier is offering. Well, in case you didn’t make a proper price research (e.g. comparing prices between several different suppliers), you might actually be paying more than you should.
However, Chinese suppliers rarely hesitate to make grand promises (as long as they don’t need to sign anything). What I’m saying is that you should take the new offer, with a grain of salt. A supplier that’s quoting far below the market price, is probably not telling you the whole story. You might end up with a product that’s not matching your quality requirements, product specifications or the legal certification standards in your country. Some Chinese suppliers are in fact ready to go that far, in order to get a new customer – if only for one purchase.
Another common practice is raising the price just in time for the initial deposit payment. Yet, must importers cough up the money in the end. They are simply desperate to get their goods and cannot afford to start over from scratch with the supplier sourcing. Chinese suppliers are aware of this.
If it’s not broke, don’t fix it. Changing a supplier is risky and time consuming. A minor price reduction is certainly not good enough of a reason to do so. If you really want to go down that path, make sure you maintain your relationship with your existing supplier before switching. As a matter of fact, having a backup supplier is not a bad thing. We’ll get to that in a bit.
Advice #2: Don’t squeeze your supplier’s margins
Chinese suppliers are accustomed to price negotiation. To a certain degree, it’s even expected. That being said, your supplier is a commercial enterprise – not a charity. If they don’t make a worthwhile profit on your order, they’ll give your orders less attention. They might even take it as far as reducing the quality of your product, without telling you. Chinese suppliers have thin profit margins as it is. If your product really is that price sensitive, consider buying bigger volumes.
Advice #3: Don’t relax your Quality Assurance procedure
A few years ago while discussing a test order with a manufacturer in Nantong, something quite interesting occurred. While I explained our Quality Assurance terms, the supplier repeatedly kept telling me that quality inspections and product testing was not necessary beyond the first order. They implied that we should “trust” them if they proved to be reliable.
They tested us. They wanted to see if we were pushovers. However, my polite answer was that we will never relax our Quality Assurance process. I told them a pre-shipment inspection and a lab test was to be executed on each and every batch that we order from them.
If you do relax your requirements, you might experience something called quality fade. The supplier seizes the opportunity to increase their profit margins by using cheap and substandard materials. The quality is lowered bit by bit, until you notice that something is wrong. That’s not a good thing. Make your supplier know that you’re not one of those gullible fools. Let them mess with the production of your competition instead.
Advice #4: Never rely on one contact person
Ever wondered why Chinese sales agents stick to G-mail and Hotmail email accounts, rather than using the company email? That’s because they essentially consider themselves as freelancers. The staff turnover is very high in China. It’s almost certain that your existing contact person will pack up his or her bags and go to another company at some point.
When that happens, you don’t want him or her to take your business to a new supplier – a supplier you know nothing about. A supplier that may offer horrible working conditions and have zero respect for your quality requirements. What makes things even worse, is that you might not even know this, until you receive a batch of useless goods.
Then there are payment frauds. Not so long ago, an employee of a long term supplier suddenly sent us an invoice with payment details of another company. It turned out that the sales agent left a few weeks earlier and tried to seize the opportunity to either defraud the client – or bring in the order for another supplier. We’ll never know, because we didn’t pay that invoice. If you need help ensuring that you don’t get caught up in a similar situation – feel free to contact us. Our Supplier Screening service includes verification of both a suppliers legal status and their bank accounts – in order to help you avoid scams. Click here to find out more.
You need to ensure that you got more than one contact person in your supplier’s office. This way you can be quite sure that you always got someone on your side.
Advice #5: How to manage price increases
China is a chaotic place to run a business. I know from experience. Compared to the west, controlling costs is much harder in China. Minimum wages are increased, shipping costs are changing from week to week and the suppliers subcontractors are doing whatever they can do squeeze their profits. What I’m saying is that price increases are certain. That’s also why Chinese suppliers are highly reluctant to accept fixed price contracts.
However, there are certain limitations to how much the supplier should be able to get away with. While wages might increase 10 – 15% from one year to another, this is not a valid reason for the supplier to raise the price with the same percentage. The labor cost is often a fraction (5 – 20%) of the production cost. Other costs, such as raw material price increases should be backed up by a third party source.
Price increment terms shall be specified in the Sales Agreement. At least, this gives the supplier an impression that you’re not willing to pay whatever price they ask of you. A backup supplier or two is even better.
Advice #6: Avoid last minute orders
I’ve dealt with plenty of situations where I keep reminding clients for months that “it’s about time you place that order now, if you want to have products delivered before Christmas”. Time goes by and all the sudden it’s October. This is the time of the year when I get desperate calls from importers around the world in need, to get their last minute orders in place.
To begin with, Chinese suppliers rarely have products in stock. The majority doesn’t have components and raw materials in stock, apart from what’s needed for their current production. Most suppliers have a production time of roughly 30 days. That also includes components and raw materials purchasing. From then on, it takes at least another 30 days before your products arrive in the Port of Loading. But that’s not all. Placing the order takes time too. You need to get this and that confirmed. The payment takes a few working days. The supplier needs to repair a few defects. A few days go to waste in a port warehouse – and so on. Things always take more time than expected, especially in China.
In the end, the lead time is in general around 3 months. However, I’d go even further and say that you should place your order at least 4 months before your delivery deadline. In a worst case scenario, your quality inspector might discover a large number of defective units – large enough to force the supplier to make a production re-run. This is something that too few importers take into consideration.
Advice #7: Give your supplier a compliance bonus
Giving a supplier an incentive to comply with your product specification is critical. In general, this is done by making the supplier aware that they got something to lose in case they don’t comply. However, some companies take this even further – they offer the supplier a bonus payment if the goods are compliant with all their quality requirements. It’s a clever tactic, because it can make the supplier put in that little bit of extra effort. It doesn’t have to be a lot of money, a few percentage of the total order value might be enough to make a difference.
