Chapter 15 – Some Common Discussion Points

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 about 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 suppliers’ 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 your company established?
  • Who are the owner(s)?
  • How many production lines do you have?
  • How many workers does your factory employ?
  • 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 metal punching done in house?
  • Is your factory ISO 9000 or ISO 9001 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 costs 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 seasons 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 a 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 than 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 you to jump start production with your cash. If something goes wrong and the likelihood is rather great that something will, you will 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 of 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 prices right away. You could end up with prices matching your target prices 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 also 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/factory to lower the product quality by using cheaper materials in order to obtain the purchase order.

Think of the lead paint tainted toys that were recently imported into the United States but had to be recalled in very large numbers. I do not know the real reason why this cheaper but dangerous paint was used in the first place. It could have been pure greed but it also could have been that the buyer pushed the suppliers too hard for lower prices that he could not achieve without cutting corners.

Although China is a land of nearly unlimited opportunities, their factories cannot escape worldwide developments and price hikes. With the price of oil above US$ 130.00 per barrel and the US$ is at its lowest value in many years, Chinese suppliers/factories are also feeling the crunch and have to adjust to survive.

This means it will be difficult for you to negotiate much lower prices because there is no more room for your supplier/factory to maneuver. On the other hand, it cannot be much of a disadvantage for you because everybody faces the same problem.

Do not forget to take photos of the showroom samples with a digital camera. Sometimes you may have to shoot photos from different angles to get it right. Digital photos are essentially free, so more is better than less.

You don’t often have the opportunity to meet your suppliers in person.  Use your time well to collect all the information you can. What you learn now could be vital evidence if there is some kind of misunderstanding later.

Specific Discussion Points
Visiting a New Supplier for the First Time to Perform a Detailed Evaluation

Since you want to make sure that the supplier is the right business partner, you will have to ask them many questions to verify it. Be sure to furnish all the necessary background information so they can fully answer your questions.

You want to show them your Company Catalog and explain your company’s policies. Part of your company’s policies is your corporate identity artwork concept, which you need to explain thoroughly. This includes Sketches, Drawings, and Photos of packaging and branding information along with anything else that sets your company’s products apart from others. Here you must go into detail to be sure the factory has a clear picture of what you need.

The supplier might not be able to meet your requirements but they may tell you where you can find products meeting your exact needs. This can be very helpful information and save a lot of time.

Bring along ads from newspapers and magazines showing products already being distributed by others that you are interested in for your customers.

Be prepared with color chips of any pre-selected colors. Ideally, these will be real chips that you cut from products similar to what you are looking to buy. You will probably want to leave these samples with the supplier so they have something tangible to develop for the plastic injection molds. Otherwise, you will lose time and money by having to send them when you get home. Your supplier may also have a question regarding the color and you can discuss the details much better face to face.

You want realistic price and delivery quotations from the supplier. To accomplish this you must inform them about your required specifications. Your quality requirement is a very important cost factor. The requested quality standard is defined by your Acceptable Quality Level (AQL) which sets the limits of the satisfactory process average.

Finally, you need to discuss your entire shopping list, which is what the suppliers are mainly interested in. This gives them an idea about your company’s buying potential.

This is a lot of information but if you prepare some copies for the supplier, you can focus on the main points during the meeting. Be sure to ask them to study all of the details and get back to you if they have any questions.

Visiting a Supplier to Discuss a New Large Volume Project

The goal of this visit assumes a certain familiarity with the supplier. Without knowledge of the supplier/factory, you would not want to place a large volume order with all the inherent risks involved.

You have to be very specific here. Give as much information as you can, to be followed by written records if possible in Chinese and English.  The supplier’s engineers may not listen carefully enough or may not take adequate notes. If there is a written record, it is something they can consult later if they need to verify details.

Some technical issues cannot be understood by the sales managers because they usually lack a technical background. This stresses the fact that it is important to have the right people attend the meeting.

Do not make the mistake of meeting the sales manager in the comfort of your hotel lounge for lunch to deliver the details of your project. He will never admit that he does not completely understand what you told him and the engineers will receive filtered information. Undoubtedly, lacking the vital technical information that will cause complications with your project.

On several occasions, I have seen the engineers receive more than their share of the blame from their management for improper samples, missed deadlines, etc. If they had the correct instructions since the beginning, the entire disaster would have been averted.

At times, I have had important meetings attended by 3-4 marketing staff, up to 7 engineers, plus the company’s president or vice president. Admittedly, it can be time consuming to get the entire message across to this many people. However, in the long run it is time well spent so that mistakes or complete project failures do not occur later.

Often, you begin these negotiations at the inquiry stage. Your customer at home wants more information before placing a firm order through you, the importer. You increase your chances of successfully landing the order if you can negotiate all of the terms, conditions, and price with the supplier. Your personal relationship comes into play at this stage of negotiation.

Commonly, a large retailer will request several importers to submit a proposal for a large purchase order. If you think this is the situation, ask the supplier/factory if they have received similar requests from other importers. If you have a good working relationship with the supplier, it can set the wheels in motion for you to receive the winning bid over your competition.

If you have treated the supplier fairly in the past and have not pushed unduly hard when their back was against the wall, they may reward your good relationship with the preferential quote that seals your deal with the customer back home.

Visiting a Supplier Where You Are Having Major Problems with the Quality And/Or Delivery Schedule

Here you get right into the details by asking management for a full explanation of the problems and what they are doing to solve them.

They should have had plenty of time to investigate the problems internally, after you first alerted them. It is totally unreasonable for them to request time to investigate at this point in time. You should expect them to be reporting solutions and progress towards fully resolving every issue you have identified. 

To give you a full understanding, I will illustrate with a personal example. One of our factories was scheduled to deliver a large quantity of products with a tight deadline. Three separate shipment dates were involved. Unforeseen events delayed the start of production. This was compounded by the fact that they only had a single mold for the plastic injection machines. It became obvious they were not going to be able to meet the first shipping deadline for this important contract. 

Working closely with the factory management, I was able to convince them to manufacture another injection mold. Although it increased their costs for this project, management realized that it would enable them to take on additional customers in the future.

By reacting quickly and proactively, production was doubled in approximately 2 ½ months. The project was saved by reacting quickly to get a timely solution in place.

The main point is that it is essential to visit the factory yourself or appoint a consultancy service organization like our company, as soon as possible, when you are facing major problems. Problems with large volume orders cannot afford delayed solutions. Not only does this solve the immediate problem but it also demonstrates that you mean business and expect the factory to take any problems with your orders seriously. 

Subcontractors may also be part of the problem. The factory may not be receiving the needed or correct raw materials, components, printed materials, etc. Do not hesitate to insist these parties directly participate in the meetings. They may only need to attend specific sessions but they definitely need to be part of the solution, if they are part of the problem.

Make it clear to the factory that you expect a solution to the problem to be found during your visit. Do not give them the option of waiting until you return home before proposing and implementing a solution. Once you do return home, request that regular progress reports be sent to you.

Detailed Negotiates of Conditions and Prices for New Large Volume Orders

It is common to negotiate better conditions and prices for large volume orders with the factory. If you can give them a larger than average order, they in turn have a better chance of negotiating lower prices for raw materials and components if they order them in bulk quantities.

Here is an example of negotiating the details. If the factory needs an average of 50K electric switches per month they typically negotiate the price based upon 50K per month. If you come to them with an order requiring 200K electrical switches for a single shipment they will certainly get a better price from their supplier that can be included in a lower price quote for you. This might only be 2 or 3 US cents but adding up the savings on all the components will give you a substantial price reduction.

Of course, this also applies to printed material and packing materials. Do not forget to ask for a price concession for the factory’s savings from reduced tooling setups and other production startup costs when they will benefit from a long production run.

Just telling the factory that you need a 10% lower price is not convincing to the factory. They will give you the standard reply that they cannot afford it. The right strategy is breaking down the product into its components or materials to make your request more convincing.

Remember, every saved cent increases your profit margin. However, be realistic and do not overdo the negotiations because it could backfire. The factories might choose to save costs by reducing the quality of the delivered product.

Again, a real life example to demonstrate what could happen. Factories can increase the percentage of recycled plastic material marginally and you won’t realize it even during a final random inspection.

The plastic material becomes softer and the surface less glossy. It also leads to a lower melting point for the plastic. If it is used for home electrical appliances (toasters for instance) it may more easily deform when exposed to heat.

Another quality problem with plastic materials that you may have experienced in your own home is the lack of UV stability. Lack of UV stability causes discoloration in plastics when exposed to sunlight over time. UV stability is a cost factor to the factory and they know it will not be caught until long after the goods leave the factory.

If you intend to import electrical appliances and electronic equipment to Europe, the goods must comply with the ROHS directives (Restriction of Hazardous Substances). Member states agreed that after 1st July 2006, any product new to the market will not contain any of the six banned substances in quantities exceeding established maximum concentration values. The six substances are lead, mercury, cadmium, hexavalent chromium, poly-brominated biphenyls (PBB), and polybrominated diphenyl ethers (PBDE).

The factory must prove to you that they are complying with these directives, but it is very difficult for you to verify it because of the high cost involved.

The point is to make you aware that the factory has plenty of options to reduce their cost when you negotiate unreasonably. First, they will use legal methods to get costs down but might resort to illegal methods if you push them too hard. Your working relationship should be a partnership that seeks a compromise rather than to continue squeezing.

Those are the general discussion points but you need to address these other key points during the meeting:

Check One More Time to Be Sure the Factory Clearly Understands Your Specifications

Most important is to make sure that factory management understands your specifications.

What sort of things do you need to specify? Have you included?:

  • Labeling
  • Any special markings
  • Packaging including the quality of cardboard
  • Materials or components to be used
  • Types and colors of paints and finishes
  • Instructions in one language or several languages suitable for your clients? Instructions in Chinese do not go over well in Europe or the USA.

Many importers use the Pantone Color Chart numbers to instruct the factory about their color or color combination requirements. Follow this link to the online Pantone Color Chart:

I can tell you from my experience that the results will not be very good. Especially if you have several factories involved which have to follow your color requirements.

It is much more practical and produces better results when you use color chips instead. You can buy items that have the correct color in your home country and cut off some pieces of the plastic material. Always keep several reference samples for yourself and handover a piece that is a reasonable size to each factory. Reasonable does not mean a thumbnail sized one because it is not large enough for the factory to make the injection color accurately.

Other Tests That Should be Considered

Also, consider the tests to be conducted during manufacturing and at completion. Do you need CE or ROHS approvals for importing electrical goods to Europe? If wood is contained in the product or the packing, are fumigation certificates required?

Protect Yourself From Copyright Infringements

Does the factory or supplier own the intellectual property rights of the product? Do not believe you can import well-known international brands unless you intend to buy them from the brand owner. Gucci, Samsung, Sony, Philips, or any owner of a well-known brand certainly will not allow a Chinese supplier to sell their branded products at low prices through the back door! China is probably the world’s largest source of fake or pirated goods with well-known logos and branding that are simply copies, or worse, just a logo stuck on a similar looking product.

Worse yet, not only will there be little or no warranty but you risk serious legal action and possibly a criminal conviction, if you cannot show proof of ownership of the brand name or that an agreement exists with the brand owner – when you import under a brand other than your own or the factory’s. Even if it is the factory’s brand, you still need to have a written agreement with them to distribute it. Please take this very seriously and do not even consider trying to import fake goods. It would destroy your reputation at home in addition to the possible legal proceedings.

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