The Seven Deadly Sins of China SourcingWe get questions all the time from clients wanting to know the perils and pitfalls of doing business with China. We have written often about how to set up a solid supply chain with Chinese factories and offered key tips on how to source effectively from China. So we thought now would be a good time, as we move into the new Chinese Year, to provide a concise list of some of the challenges to keep in mind when sourc-ing product from China.

GLUTTONY - One of the biggest challenges for many buyers, especially inventors or small companies that do not have proven sales channels for the products they wish to manufac-

ture, are the particularly onerous minimum order quantities (MOQs) that are imposed by Chinese factories. High MOQs typically result in

an order that exceeds the number of pieces a buyer would normally wish to purchase. The consequences can be significant. For one, there is the

capital cost of purchasing large quantities of product that will sit in in-ventory while sales evolve. The inventory not only has a capital cost of carry (including the cost of goods, warehousing expenses, inventory management expenses, etc.) but also aging expenses that can result from packaging becoming damaged or the product being held past a GTD (good-til-date). Therefore, it is often advisable to try and find a

lo- cal solution - one that can be easily monitored - with a factory that is willing to do smaller order quantities (at a higher price, of course) until sales channels can be developed and Chinese MOQs are not as daunting.

GREED - We often come across companies that are willing to do just about anything as long as they get the best price on the products that they wish to source. Some companies, especially for products that behave more like commodities, have been even willing to take massive qual-ity discounts in order to improve their pricing position. The argument goes something like this: while we realize the price we are paying is only possible because the sup-plier is using the lowest quality materials/products/pro-cesses to manufacture our goods, I am willing to accept the defectives and problems that come along with this be-cause the savings I am obtaining more than makes up for the returns and allowances I need to provide to cover my losses. Of course, the logic is flawed on many levels. But you would be surprised how many companies we have encountered that think exactly this way. The reality is that for most companies, the lowest price alternative is usually the highest cost solution because the expenses related to delays in production (while defective goods are addressed), returns by clients, brand dilution, and even time dedicated to factory selection (usually the lowest price manufacturers are far more likely to go out of business) etc. more than exceed any savings. This is the norm and hence we encourage all our clients to look for delayed gratifica-tion when purchasing from China - they will be happier in the long run.

| Guadalajara & Mexico City, Mexico | Toronto, Canada | Fort Lauderdale, Florida | São Paulo & Florianópolis, Brazil | Shanghai & Shenzen, China | | www.thechinasourcingexperts.com | 1-877-673-7887 |

Copyright© Sertus, LLC 2014. All Rights Reserved.

Wrath - At some point, anyone having done business with China will have fallen prey to this cardinal sin. The capital vice of wrath, or the inordinate and uncon-trolled feelings of anger, are frequently the product of some bad experience that usually is rooted in a perceived slight by a supplier. Sometimes the slight is signifi-cant (like outright fraud or larceny, piracy, etc.) and other times it is less egregious but equally frustrating (like breeches in quality control, oversights, excessive delays in delivery, among others). Too often the problem can be traced back to

a poorly established relationship with the supplier. This is not to say that are inherently good intentioned and are led astray because of a faulty relationship. Clearly there are some self-serving, malevolent deceit-ful companies operating in China. But we have found attention to building personal relationships with counterparts to be key in separating the wheat from the chaff. Guanxi (pronounced “gwan-shee”), is usu-ally translated as “social connections” or “relationships”. But these definitions don’t do justice to the full meaning of the term. Guanxi is a system of mutual obligation – one that has been described as relation-ships based on mutual dependence. With good guanxi, there is a much higher chance that wrath is kept to a minimum.

Envy – Ask someone who has experience sourcing from China how they ended up working with Chinese manufac-turers and most will tell you a success story of an acquain-tance or possibly a company they read about. There is a huge amount of “me too” that has brought thousands of companies to look for their Chinese factory that will make them millions. China manufacturers do have a reputation of being expert copycats. Send a sample of a product you would like to source and they can create an exact replica at competitive costs. But recently, China has become more adroit at developing new designs and as a result, contract-manufacturing capabilities have been on the rise. Growing individualism is supporting consumer demand for unique products and China manufacturers are attending to the needs for greater customization. Yet there continues to be a great distrust of Chinese factories and many companies with unique designs are reluctant to send them to China for fear their intel-lectual property will be stolen. While legal protective mechanisms exist, enforcement in China is still not a simple process and can be expensive, reducing the effectiveness of patent registration and fueling the fears of idea theft. There are supply chain solutions that can be implemented, which are far more effec-tive at protecting intellectual property but you need a partner you can trust to help you implement these strategies.

The Seven Deadly Sins of China Sourcing

| Guadalajara & Mexico City, Mexico | Toronto, Canada | Fort Lauderdale, Florida | São Paulo & Florianópolis, Brazil | Shanghai & Shenzen, China | | www.thechinasourcingexperts.com | 1-877-673-7887 |

Copyright© Sertus, LLC 2014. All Rights Reserved.

| Guadalajara & Mexico City, Mexico | Toronto, Canada | Fort Lauderdale, Florida | São Paulo & Florianópolis, Brazil | Shanghai & Shenzen, China | | www.thechinasourcingexperts.com | 1-877-673-7887 |

Copyright© Sertus, LLC 2014. All Rights Reserved.

Pride – Perhaps the most serious of the seven deadly sins (as it is the origin of the others) is pride. In China sourcing, this is the “I can do it all” complex. I am smart enough, sufficiently qualified, experienced, and knowledgeable to be able to find my own suppliers, place my own orders and manage this from hundreds of miles away. But the reality is that even the mere barriers of time and distance make this difficult and impractical. There are many companies that can help with setting up an efficient and practical supply chain that can help with China product procurement, purchasing, produc-tion management, quality control and delivery. Find a partner that can act as your eyes and ears on the ground in China – an advocate for your interests – and that can help you with all your negotiations with Chinese suppliers. Invest your time in building this trustworthy relationship and it will save you millions in the long run.

Sloth – One thing is certain: in China lead times can be lengthy and will be certainly longer than you antici-pate. But good preparation and oversight can significantly eliminate excesses from the production schedule.

Understanding your suppliers’ production cycle is important but having a contingency plan is vital. China’s infrastructure has vastly improved but it is still challenging. Elec-tricity shortages that have shut down production lines are more common that one may think. Similarly, there have been thousands of companies that have shut their doors due to aggressive business practices implemented to win market share or simply due to ruthless competition. For your manufacturer, losing a supplier could paralyze his pro-duction line and delay delivery of your goods. Likewise, factories regularly will leap frog your order in the production queue for a more profitable or important client, pushing back your delivery date. Hence a robust production management and monitoring plan will help keep your orders on time and save you money.

Lust – The last of the deadly sins is lust. In China, the ob-ject of desire is money and most factories will do just about anything to get their fair share. But it is the lust of the buyer that we wish to focus on here. Too often, companies looking to source product from China are over eager to place their order and get their products delivered. It is highly com-mon for buyers to be in need of the goods they are ordering in a time frame that is not only shorter than what normal production cycles in China would dictate, but often so far in advance that they begin to cut corners. This is a huge mis-take. Perhaps the most important single piece of advice we could give buyers is to do the heavy lifting up front. Prepare. Prepare. Prepare. And when you are done with preparing – prepare some more. We can’t stress enough the importance of clear standards that are clearly communicated to your factory and taking the time to get a perfect sample prior to mass production. Even the process of factory selection should be done with great care and diligence. All of these precautionary activities will save you money and hassle later on.

The Seven Deadly Sins of China Sourcing