Working with Suppliers

You can work with two types of suppliers: factories and trading companies. A lot of the decision regarding which way to go depends on your product and how much of a presence you can maintain in China. Whether you go with a factory or trading company, you have to watch out for quality issues.

Finding suppliers

Finding suppliers in China is relatively easy. Finding good suppliers isn’t! Ironically, China’s explosive growth has made good suppliers harder to find because the market is flooded with so many poor operators.

You can find suppliers remotely, but you should always go to China to perform due diligence (DD). Here are a few ways to connect with suppliers:

✓	Ask for referrals. Hands down, the best way to find suppliers is to receive referrals from people you trust. (For tips on networking, see Chapter 15.)
✓	Peruse trade magazines for your industry. Just check out the ads and the companies in the featured articles.
✓	Surf Web sites that have a good deal of suppliers from China. Three of the better-known sites are www.alibaba.com, www.globalsources.com, and www.tradenet.com.
✓	Attend trade shows. China has numerous industry trade shows, and odds are that your industry has at least one trade show per year there. The gargantuan Canton Fair takes place biannually, every April and October (www.cantonfair.org.cn/en). If you’re thinking about going to the Canton Fair, plan early! Hotels and flights fill up quickly.

The middleman: Surveying trade-offs of trading companies

Trading companies are middlemen between you and factories. Good trading companies can add a lot of value. They often know the right supplier for your product, manage the supplier, do quality control (QC), and pass along volume discounts. Usually, trading companies have people who speak better English than factories do, and they’re most accustomed to dealing with foreign customers.

Perhaps most importantly, a good trading company will make you whole (by giving money back or ensuring you get the product somehow) when you have problems with the order. Even good factories can have internal problems, such as turnover issues, that you’re not aware of. A good trading company that specializes in your industry can stay on top of these changes and seam-lessly find new suppliers.

A trading company saves the day A foreign-owned trading company was working on a particularly large furniture project for a new luxury hotel in the South Pacific. The trading company approved a sample for a teak chair from a large Chinese factory. When the factory completed the order of 1,000 chairs, the coloring of the teak was completely off. The trading company suspected that the factory used inferior wood, but the factory vehemently denied any wrongdoing. Instead of allowing the customer to be inconvenienced by the squabble, the trading company immediately found another factory to produce the chairs. The other factory was backlogged with orders, so the trading company paid a lot of its own money to go to the front of the queue. The second factory then produced the chairs on time and to specification. Even though the trading company had to find another factory, was out its deposit on the inferior chairs, was out a lot of money to the second factory, and was gearing up to do battle with the first factory, the customer never knew there was any problem!

Some people don’t like dealing with trading companies because they (sometimes incorrectly) think they can save their business money by dealing directly with the factories. Not to mention, bad trading companies can cause a lot of problems, too. Many trading companies are fly-by-night operations that won’t be able to reimburse you if they have problems with the order. These companies often don’t do QC and can end up costing you a decent bit more than dealing directly with the factory would.

If you come across a trading company that first tries to pass itself off as a factory, run! A number of trading companies impersonate factories because they want you to think they control the production process. These companies are usually amateurish and lack the honesty to make you whole in event of a problem.

If you’re considering dealing with a trading company, you want to ensure three things:

✓	It has the financial strength to compensate you for problems.
✓	It’s well run.
✓	It’s not on your home government’s “restricted” list.

Operating on a shoestring budget is easier for Chinese trading companies because the registered capital requirements for Chinese firms are lower than for foreign ones.

Do due diligence (DD) on trading companies. View their business license (see Chapter 17), which shows their registered capital; the more registered capital, the likelier the company is to be financially strong. Visit the trading company’s offices and apply a common-sense test. The Chinese are very much into appearances, so if they can’t make the company look decent, you have little hope that it actually is. You should also ask for a customer list and do some cross-checking.

Straight from the source: Dealing directly with factories

Factories may be able to give you lower prices than you’d get from many trading companies. Also, starting a factory takes more money than starting a trading company, so the factory you work with is less likely to fold unexpectedly. You must still do on-site due diligence (DD) on factories, however, just as you should with trading companies. The following sections explain what factory DD and quality control (QC) involve.

Factories in the same locale often produce similar goods at similar quality levels and have similar levels of customer service. If you can’t find anyone who knows the particular factory you’re considering, see whether people can give you a sense of the reputation of factories in the area.

Completing factory due diligence

Due diligence doesn’t do much good if you see the factory when it isn’t humming, so tour the factory when it’s in the middle of a production run. Make sure your senior technical person participates in the DD.

In most cases, factory inspection isn’t rocket science. Here’s a basic checklist of items to focus on when you tour a factory:

✓	Cleanliness: Appearances count for a lot. If the workers, managers, or the factory appears sloppy, assume that attitude carries over into their products — especially with electronics.
✓	Organization: See the entire process — from where materials come in to how they’re processed into products to how and where they’re stored. Think about whether the workflow makes sense and is efficient. If some things don’t make sense, ask questions. If you still can’t figure out why the factory is doing something a certain way, that’s a red flag. Pay particular attention to where finished goods are stored and shipped from. You certainly don’t want any of your order to go missing or be placed on the wrong container!
✓	Machinery: Have someone at the factory tell you about the machines. What exactly do they do? How old are they? What are the brands? Where did they come from? How much maintenance is required? Does the factory have the equipment to cover all stages of the production process? The answers may mean little in and of themselves, but you may understand some important points if you compare factories (which you usually should). Plus, asking questions sends the message that you pay attention to details.
✓	Quality control (QC): Ask to see the data on the QC inspections on incoming materials. You may also want to inspect the factory’s suppliers, depending on the type of inputs. Factories can also have QC inspections at various points throughout the production process. Finished goods should always undergo at least some inspection. Regardless of how many QC checkpoints the factory uses, the location of the checkpoints and where and how the failed parts are handled should be clear. If that information isn’t clear to you on a walkthrough, it likely isn’t clear to the workers, either! Some factories may have received certain process certifications, such as ISO 9000 and 9001. If you’re interested in the factory’s certifications, make sure they actually follow the certification requirements in everyday production.
✓	Employee conditions: Make sure the factory isn’t using prison or child labor. Ask to see the employees’ cafeteria and dormitories. You shouldn’t expect the Four Seasons, but the dorms should be clean and orderly. Find out how long the employees have for lunch and how long their shifts are. Ask about what training the employees receive. See whether the factory offers much of a career path for them. Happy employees do their jobs better and are less likely to cause production delays and quality issues through turnover.
✓	Location: You want to understand and evaluate the factory’s location for three reasons: Utility quotas: Limits on electricity can be especially problematic — particularly for factories in and around big cities. You want to assess the area’s utility reliability and whether the factory has backup facilities. Water may also be rationed in certain areas. Closeness to suppliers: If the factory’s suppliers aren’t that close, really pay attention to the inventory — try to figure out whether they keep enough raw materials on hand to deal with an unexpected supply bottleneck. Proximity to a port from which they can ship you the goods: You obviously don’t want a backup on the way out of the factory, either.

Doing your own quality control

When a factory is producing your order, being there to do your own QC is best. If you’re big enough, you can maintain an office in China that does onsite QC during production runs. These offices can look for new suppliers, too.

Foreign companies that don’t have China offices commonly send people to China during production runs. These employees do constant QC at the suppliers’ factories, often for several weeks at a time. For higher-end goods, have somebody from your company live at the factory 24/7 during production runs.

Be careful if you send a low-paid employee to do QC — buying off somebody earning only US$300 per month isn’t that hard. Inspect the products before they’re packed for shipment. Also consider doing a loading and stowage inspection for the first few shipments so you can be sure the goods are properly loaded into the container. When you receive your shipment, check both the quantity and quality of what you receive.

If you’re unable to have someone live at the factory during production, note that some companies specialize in QC (as well as factory DD). Some are good, but others may take kickbacks from the factories. You can find QC/DD companies on the same trading Web sites where you find factories and trading companies.