Archive for April, 2012

Why are the First Impressions of your Factory Visits in China very Important?

Immediately after arriving at the factory, you begin taking in information about how well it is or is not run. Of course, this is only the first impression but this is where the whole picture begins developing.

The Front Gate

Some larger factories have uniformed guards at the gates. Often the uniforms are nearly perfect replicas of the police. I mention it here because this can lead to confusion or a misunderstanding that the factory is involved with a police incident.

If you do not see any guards or only a single lonely guy guarding the entrance, you can bet that the factory is not paying much attention to security or wants to save money.

Finding waste material near the entrance area it is an indication that factory management is not concerned about cleanliness and tidiness. It can also indicate that they have not many customers visiting. Otherwise, the area would be cleaned up on a regular basis.

The Factory Grounds

You should be also concerned if you see finished goods stacked outside the factory building, especially if the goods are not even covered by a roof. The Southern China costal area is prone to frequent showers and you do not want your goods loaded into a shipping container with a wet outer carton.

After 4 weeks in the container, most of the products will be nothing but garbage. I am not exaggerating. Unfortunately, I have seen many such scenarios, which is why I mention the subject. To be clear, I am not talking of goods in the process of being loaded into a container but about goods that are being stored outside.

It is not just rain that damages unprotected goods. Sunshine bleaches the corrugated cardboard material and high humidity will soften it.

If you find both a lack of security and weather battered goods, you may already have as much information about the factory as you need.

Entering the Factory

Your next impression might be a surprise if you find that the factory is much smaller than expected. You could also find that the factory buildings are in a very bad condition. An indication that the factory lacks funds to modernize.

You can expect the guard to alert management of your arrival and somebody should be sent to pick you up. If that does not happen and they let you stroll around the factory area without anyone’s attention, it is another sign of poor management.

Some factories are very large and you will definitely need assistance to find the management office. The better organized and large factories have a separate reception desk to welcome visitors. You will sign a guest register and be given a visitor’s identification badge.

It should not be normal procedure for visitors to wander around the factory unaccompanied. If somebody visits your home, you would not appreciate finding him or her coming and going from you rooms without your knowledge.

The front desk staff can communicate in English. Normally, the larger the factory, the better the command of English. Once you are registered, the receptionist will contact the management office to send somebody for you.

Remember some factories cover an area exceeding 100,000 square meters. Without assistance you will be lost in no time.

If the factory is really well organized and experienced at receiving visitors frequently, everything will work like a breeze. They may even have a welcome sign on a reader board with your name and your company’s name on it. Something like a small marquee. Take a moment to admire and praise it, which will please your hosts. Taking a photo of it would be even better.

The Showroom or Conference Room

Your next stop will probably be the showroom or conference room, take your time to observe how the office is organized. If there are many empty cubicles, it is an indication that either the factory does not have enough employees or it is lacking in purchase orders.

You can also see whether the employees are playing computer games or chatting online. Hopefully they are really busy with purchase order related work. Of course you are not visiting the factory as their supervisor but it is always good to study as much as you can for your own good.

After a few factory visits this will all become routine for you.

Multiple Factory Visits in China will Save you substantial Money

For economic reasons and to collect more information it is advisable to visit several factories in the same area during you trip.

Gaining Competitive Knowledge

Factories keep track of details about their competitors due to the frequent change of engineers and managers. They usually stay in contact with previous colleagues and know exactly what is going on in their old factory long after they have left.

Over the years, you will receive frequent invitations from factory managers that have moved to new factories and want to regain you as a customer. It is often a good chance to obtain better prices as an incentive to buy from them.

You can only determine a factory’s quality and capacity by visiting the new factory and properly evaluating it. Keep in mind, a new factory manager can turn an inferior factory around, but you are better off waiting until that has happened before placing your purchase orders.

Start Planning You Travel Time in China

It can be tempting to invite managers from several factories to meet with you in the comfort of your hotel. However, it makes much more sense to visit your suppliers at their factory. You need to meet the full factory team and survey the operations.

China is a vast country. You will want to visit several factories in the region you are visiting. It is common for people to underestimate the travel time between their hotel and the factories as well as from one factory to another. Here are some general travel times for you to use as you begin planning a trip:

Greater Ningbo Area

After arriving at the Ningbo International Airport you can expect at least another 1 hour by car to reach your first factory. Take this in to consideration so that you do not waste precious time in a car. Further on, I will give you some tips to maximize the use of your travel time. Car travel is generally the only way you can reach factories in this area.

Foshan/Shunde Area

This is another industrial area, which is located in the Southern China Guangdong province. You can reach it conveniently by ferry from Hong Kong. Upon arrival, you still need to ride 30-45 minutes by car to reach your first factory. Knowing that the ferry takes 2 1/4 hours lets you easily calculate that it is impossible to visit more than 2 factories per day if you want to evaluate them thoroughly.

Since travel occupies a lot of your time, it is advisable that you make enquiries with each factory ahead of time. Learn their exact locations and ask for scheduling suggestions. Following their suggestions will save substantial travel time that is better spent in meetings and evaluating the factories. Another tip is for you to ask the factory to arrange for your ground travel including onward travel to the next factory. They are usually happy to accommodate you.

How to make the right Trip Preparations for your Factory Visits in China

Thorough trip preparations help you improve your chances for a successful visit. Although it depends very much on the main goals of your visit the following general preparations will fit most of them.

Will the Electricity Be On During Your Visit?

Chinese factories are forced by the government not to use electric power one or two days per week. This government imposed outage rotates between industries and factories during the week (including Saturdays and Sundays) because demand outstrips supply. Heavy penalties are imposed if they break the rules. Most factories have purchased electric power generators to overcome the shortage thereby avoiding production interruptions. Still, be sure the power will be on when you visit or you will not be able to see production operations first hand.

Business Cards are Critical!

They are lightweight and can be used long after your visit to China so bring considerably more than you would normally think is necessary. In China everybody expects you to give him at least one business card and if you are meeting with several people, you may handout a dozen or more at a time.

About Cell Phones

I suggest you check with your cell phone provider at home to see if your phone will work in Hong Kong and China. Give your cell phone number to any supplier that you prearranged to meet.

The call charges to Mainland china are very high and many visitors buy a SIM card from a China Mobile retail outlet upon arrival to reduce phone costs. The call charges in Hong Kong are cheaper but you can also buy a SIM card from one of the local service providers.

You Will Need a Digital Camera

A digital camera is one of the most important tools you will need during your visit. You will have many opportunities to shoot photos of products, production operations, and quality control operations. These will include close-up photos from details which cannot be seen in a catalogue. Do not forget to bring a spare battery with you because you probably will not have a chance to recharge the battery while traveling between factories. You may also need another memory card if you do not have already one of those 2-5 GB cards in your digital camera.

You Need a Notebook Computer

If you have a notebook computer, bring it to every meeting. If you do not have one, consider purchasing one. That purchase will be worth the money you spend for it.

Your notebook computer provides you with the necessary information for your business negotiations, plus allows you to show background information about your company, and the packaging concept for your products. You can also input vital information during your discussions without the need to take hand written notes. At the end of each day you can send this information together with the matching photos to the head office.

Colleagues at home can in that way interact and ask for additional information if something important was missed.

I suggest a large capacity battery for your notebook computer. One that lasts up to 6 hours or more. If that battery type is not available for your model, bring another fully charged battery along.

Your Company’s Catalogue

If you have your own company catalogue, bring a few sets along with you for the meetings with your suppliers. From my experience, it makes a good impression and helps to cement the relationship with your supplier if you hand over one set during the most important meetings. Remember you are your company’s ambassador and want to show your company in the best possible light.

Your Corporate Identity Artwork Concept

Creating your own corporate identity concept is very important. After spending a lot of effort on it at home, it would be a very good idea to bring it along with you to show it to the suppliers during your meetings. It enhances the impression you make and helps suppliers better understand your needs.

Sketches, Drawings, and Photos are Perfect Tools to Inform Suppliers

You should also bring along any sketches, drawings, or photos clarifying what you are looking for from your suppliers. Sometimes suppliers will tell you where you can find products and help save a lot of time.

Your Specifications

What is a specific requirement? A specific requirement could be a more complex sales packaging or an instruction manual in several languages that are often needed for Europe.

For electrical products, the plug is a substantial cost factor. The British BS plugs is more expensive than the US plug.

Quality Requirements

Your quality requirements are a very important cost factor. The requested quality standard is defined by your requested Acceptable Quality Level (AQL) that sets the limits for the satisfactory process average.

License and Royalty Fees

Other important cost factors are license and royalty fees that have to be negotiated with certain suppliers. DVD players/recorders, MP3 Players etc. are examples.

Your Shopping List

To avoid being distracted, you have to prepare your shopping list of the products you want to source. This list should include at least the following details:

  • Product description
  • Target Fob price in US$
  • Quantity of the first shipment
  • If possible an estimate of your yearly quantities
  • Requested earliest delivery date
  • Destination port
  • Packaging information of other than standard
  • Number of samples needed

What are the Major Reasons for Factory Visits in China?

You are having quality and/or delivery problems and want to know what the root cause is. You will also want to know if the problems have been satisfactory resolved or if it can be resolved before it costs a lot of profit or time.

The reasons and solutions given by factory management may not be the full story. In fact, the biggest problems may not have been identified to you at all. There could even be a cover-up going on. You want to get these resolved in short time. Visiting the factory to directly apply your skills, digging deeper is often the best answer. This is a good time to bring your own interpreter along. You probably want to talk directly with the factory’s engineers. They often have the best background information and possibly already know the best solution.

Negotiate Terms and Prices for New Large Volume Orders

If you are placing large volume orders, most likely you visited this factory this factory before and know their background.

When you have large volume orders in your hands, you have stronger bargaining powers. Factories like large volume orders for several reasons. For one, they can buy raw material and components at reduced bulk prices. A long production run means less frequent production line changes. Also, tooling costs can be spread over the larger quantities.

Once the goods are engineered and in production, it means less engineering effort is needed. Often, long production runs reduce the frequency that production workers need to be trained how to manufacture new products

Keep this in mind during your negotiations.

In my opinion, this is one of the few opportunities to negotiate better terms and pricing. While still remaining competitive with other factories, the fact is increasing costs for raw materials and components makes negotiating the price for smaller order quantities difficult. Another fact to keep in mind is these same increasing raw material and component costs mean the factory will not place orders with their suppliers until your L/C is received. However, in exchange for the large order they will pass some of their cost savings on to you.

As an importer, you are liable if something happens with your products. If it comes to a legal battle it is essential that you can prove to the court that you took all necessary precautions, including evaluating the factories on regular basis.

It is just as an important task as inspecting goods before shipment and inspecting them again upon arrival at your warehouse.

Focus on Common Discussions Points to Make Your Business Negotiations in China more successful

When visiting your suppliers’ offices the meeting normally is held in their showroom. Taking a close look at their presentation and product displays should give you a pretty good idea how well or poorly that company is organized.

Ugly, untidy, and dirty showrooms do not reflect well on the supplier’s diligence. However, that impression may deceive you because your supplier may still live up to your expectations.

I have found that at least 50% of most supplier’s showrooms in Hong Kong look like a garbage dump and you might be too scared to work with these suppliers. Rest assured that you can work with these suppliers but you need to take some precautions. If you follow my checklist and receive satisfactory answers from your suppliers, you may still want to give your new supplier a try.

It is all about competence and if you have the impression that your new supplier has enough of it, go ahead and make his day.

Effective Questions for the Supplier

Which questions should you ask during your meetings with each of your suppliers? You want to ask at least the following questions:

  • What is your Fob price in US$?
  • What is your usual port of loading? They can sometimes offer you a choice of several ports.
  • Do they have their own factory, what is the name, and where is it located?
  • When was the company established?
  • Who are the owners?
  • How many production lines do you have?
  • How many workers does your factory have?
  • What are your main export markets? If the answer is Europe, your next question should be: Which countries there?
  • Who are your main customers? Of course you are mainly interested in customers from your country but it would be interesting to know if large companies like Wal*Mart or Carrefour are buying from them.
  • What is your delivery time during normal season and peak season?
  • Are you subcontracting part of your production and if so which parts?
  • Does your factory have their own injection machines?
  • Is your factory ISO 9000 approved?
  • In the event the quantity from your shopping list is not sufficient: What is your minimum order quantity per product?
  • Which laboratory are you using for your approvals?
  • What approvals does your company already have?
  • Which certificates have been obtained?
  • What new products do you have that are not on display?
  • When can I see sketches, drawings, or photos of these new products?
  • Can you please e-mail me your bank details? You will need this to pay the sample cost when you order product samples

Here is more detail about what should be discussed based on the previous questions:

Delivery Time and Order Backlog

You need to ask the factory management about their delivery time during the low and peak season so that you have information about how long it will take for your goods to ship. This is also important to understanding the lead time needed when placing purchase orders.

Something else that needs to be asked is their current order backlog. This indicates how well the factory is doing. If they do not have many orders, there may be a reason for it, which can be important in your decision making. If the factory won’t talk about low order backlog, there is a chance that their competitor knows which proves one more time how important it is to visit the factories in person.

Port of Loading

Since factories sometimes can use different ports of loading, you need to inquire which one is usually used because the applicable freight charges will apply and you need that information to properly calculate your landed cost. Some ports have only one vessel departing per week and you must know this in advance when planning tightly scheduled shipments.

Closest International Airport

I want to mention that some products can only be shipped by airfreight. Notebook computers and MP3 players are typical examples. The key components of these products are ICs that constantly fluctuate in price. At present, the prices are in constant decline. Buyers need to receive their goods within a short time or they will not be able to make a profit. The price they need to charge will be higher then the price being charged for goods that were air shipped. That makes air shipment unavoidable.

Banking Details

When discussing the payment terms with factory management, ask them for their banking details, which will allow you to do a background check before placing your orders with them.

Payment Terms

Finally, you need to negotiate the payment terms, which are usually by irrevocable letter of credit at sight (L/C). This is usually the safest way to pay the factory and also allows them to obtain loans from their bank to start the production on time.

Never ever let the factory convince you to remit a down payment of let’s say 20 or 30% of the total order value by T/T to enable them to start your production. Ask yourself why are they asking for this? There is only one reason, which is that the factory has no money and obviously no other orders. They want to jumpstart production with your cash. If something goes wrong and the likelihood is rather great something will, you lose your money and never receive a shipment.

If the staff member you are meeting with can answer most of these questions, you can be relatively sure that it is not a trading company. Even if they pretend that they have several factories working for them, they are not likely to know all these details.

I should point out that you should have already disclosed the content of your shopping list before asking all of these questions.

About Your Shopping List

Here is the information your shopping list should include. It needs to include all of the products that you want to source. Your specific requirements may go beyond this basic list:

  • Product description
  • Target Fob price in US$
  • Quantity of the first shipment
  • If possible an estimate of your yearly quantities
  • Requested earliest delivery date
  • Destination port
  • Packaging information if other than standard
  • Number of samples needed

It is not wise to inform all suppliers about your target price right away. You could end up with prices matching your target price but you may have actually been able to negotiate a lower price.

On the other hand, inform your supplier of your target price if they quote a price that is not even close to what you want to pay.

It is essential to provide your company’s specifications before asking for price quotes. Of course, you can play the hide and seek game by not disclosing your requirements to the supplier. The big disadvantage with this is that you will be drawn into lengthy negotiations later because the supplier will tell you that his price was based on his own standard and everything above that must be added to the originally quoted price. There can be no doubt that the supplier is right.

I believe it is part of fair play to fully disclose your requirements up front. To do anything less may force your supplier to lower the product quality by using cheaper materials in order to obtain the purchase order.

Make Your Business Negotiations in China more successful by talking to the rights Persons

Thorough trip preparations will make your business trip to China more successful and will help reduce your travel expenses. Therefore, you are best advised to prepare yourself in order to make a favorable showing when negotiating with your suppliers. Poor preparations can leave a negative impression about how your company conducts business and will not achieve the desired goals.

With Whom Should You Negotiate on Your Supplier’s Side?

Talking to the right or wrong person in your supplier’s hierarchy can be the key for successful or failed negotiations.

Typically your negotiations begin with the sales manager. If technical details need to be worked out the production manager and/or one of the senior engineers will be involved.

Meeting with Decision Makers

These managers however cannot make final decisions without consulting with senior management, when the meeting carries a significant importance. Typically these are meetings where the outcome involves a lot of money. It could be a negotiation to resolve a settlement claim or it might involve a large volume purchase order. I can only advise you to go right to the top decision maker. That means you must talk to the company owner. This can be several people if it is a shareholder owned company. You may need to meet with the chairman of the board, the chief executive, or the president.

It may prove difficult to get in touch with the supplier’s decision maker because they are usually shielded by their staff. Knowing the background of your supplier is essential to pinpointing the right person if your supplier has thousands of employees.

It may pay off now, of you have visited that supplier before and already know the company hierarchy.

I have discovered on various occasions that decision makers in China go into hiding and cannot be reached by your company when there is a major settlement claim. This might seem strange but if you do not nail down an appointment with your supplier’s decision maker, you may end up talking to the people that shield him and end up just wasting more time and money.

Have Current Contact Information On Hand

It should not be this way but believe me, even as a permanent Hong Kong resident it has happened to me. I have arrived at a supplier’s office address only to find out they moved to a new location several weeks ago.

Sometimes, managers may be using up a supply of old business cards and forget to let customers know about their new office location. Or maybe it has been a while since you last talked to them and when you call or e-mail to arrange a meeting, they have forgotten you do not know that they moved. This is especially true in cities like Hong Kong or Shanghai where offices frequently move. You need to make sure that you have up to date addresses in your records.

Even more important are the cell phone numbers because this is your primary way of contacting the persons while you are traveling. In large cities, the traffic conditions can at times be terrible and you will want to inform your business partner if you will not make it on time for an appointment.

A Few of Good Travel Tips

A sketch with a Chinese character description of the supplier’s location sometimes works wonders helping your taxi driver find your supplier’s location. You might be able to draw the sketch and have someone at your hotel add the Chinese characters or have the supplier e-mail something similar to you.

If your taxi driver still has trouble finding the supplier’s location, you can call the supplier on your cell phone and ask him to give directions to the taxi driver in the local language. This usually does the trick.

You can always ask your supplier to pick you up from the hotel to avoid this problem but it can be inconvenient and time consuming to wait for the supplier to send a car. Most Chinese factories are usually glad to send a company car to pick you up. However, companies in Hong Kong or Shanghai may not be willing to provide this service.

When visiting suppliers you will want to make plans that best utilize the available time. This is even necessary if you are visiting suppliers in one of the large Chinese cities like Hong Kong, Shenzhen, Guangzhou, and Shanghai. These cities are so vast that you need a realistic plan if are going to get much accomplished.