Over the past several years of sourcing products in
1) Know your Project/Product/Market – Before you even think about talking with an overseas supplier, it is essential that you know the critical to quality factors in the product you are sourcing.
a. Materials and components (market trends) – By knowing your product’s components and materials you will be able to understand the cost structure of your supplier. Also, further knowledge of raw material costs and market trends will give you insight as to the sustainability of your product in the marketplace as well as your supplier’s ability to support you well.
b. Packaging – Packaging is a core component of your product, and plays an integral role in its pricepoint and market placement.
c. Customization requirements – Think through in advance if you have customization requirements to differentiate your product from competition. Knowing this on the front-end will help you evaluate extra costs or discounts associated with these parameters, and eliminate frequent spec changes that frustrate suppliers and delay progress.
d. Design files – I strongly recommend owning your own design files and coming up with these independently from a professional design expert. This will save you TONS of time in prototyping and will give you a more objective benchmark in comparing suppliers. Relying on suppliers’ interpretation from hackneyed pictures or prototypes will obscure objective supplier evaluation, and usually slows down project timelines.
e. Product life cycle – Familiarity with the product life-cycle of your product, or similar products, will give you critical information to evaluate the NPV (net present value) of your return on investing your time in this project. Products with short product life cycles must have a high price premium to make it worth your time. Also, you’ll need to move very quickly in bringing these types of products to market.
f. Aggregate volumes and mix – Before you begin talking with a supplier, it’s always best to have your volumes and product mix figured out before you begin talking with them. If you are looking for a sports jacket and you don’t know your size breaks and measurements along with your overall purchasing volume, your price likely change.
g. Required certifications –Before your meet with your supplier know any and all required certifications required by your country’s regulatory bodies and markets. UL? CE? ROHS? DOT?... Don’t expect your supplier to automatically know the regulatory or standard requirements for your market. If your product does not meet your country’s or industry’s certification requirements and it has already left port from your supplier, this could kill your business.
h. Customer delivery requirements – Research which warehouses or distribution centers will be receiving the goods from your supplier. This significantly impacts overall cost and helps you properly evaluate suppliers. Do not rely on EXW of FOB cost alone to evaluate a supplier.
i. In-hands delivery timelines – Delivery timeline requirements can be an automatic disqualifier for certain suppliers. I’ve seen purchasers spend weeks haggling over product specs and FOB pricing with a supplier only to find out that manufacturing and sailing timelines prohibit on-time delivery. Many big-box retailers have contract clauses that refuse payment for late shipments, keep this in mind if you’re working on these deals.
2) Extra Costs – In addition to costs that arise from your product itself along with industry and market requirements, there are other costs that are frequently overlooked.
a. Logistics – Logistics and delivery costs are a substantial cost component for doing business with your supplier. Many times you can spend a little time researching how to lower your logistics cost for a lot less effort than trying to lower unit cost from your supplier.
b. Quality control – When working with manufacturers, quality control is a cost you will pay for in one way or another. If it’s not spent at the factory during production, be forewarned you’ll pay for it in customer returns, or loss of reputation.
c. Government fees – This includes state and national taxes, tariffs, duties, and tax-back incentives. Knowing these fee structures enables fair evaluation of overall product cost. Keeping abreast of industry lobbying activities and government policies for your product category can also give you a competitive advantage in knowing when to source overseas or domestically as well.
d. Communication and travel – When selecting suppliers be sure to put a premium on suppliers that require very little handholding and are quick learners. If you have to travel internationally multiple times per year and hire a translator or assistant to execute an order, you’re not only paying for travel and communication costs, you’re paying huge opportunity costs as well.
e. TIME – Time is your company’s most precious limited resource. Once you spend it, there’s no getting it back. Be sure you consider this evaluating which supplier is right for you. If one supplier takes 100 more hours to accomplish a project vis-à-vis another supplier, if your time is worth USD100 per hour, this is a USD10,000 opportunity cost. You could be using your time to generate more revenue doing other activities.
f. Stress – Unhealthy amounts of stress can be more expensive than you think: Stress over a stressful situation not only distracts your from concentrating on other important tasks, loss of sleep from stress impacts productivity, physical health, and important relationships. If you make a million dollars on a deal but destroy your effectiveness, health and important relationships, you might find yourself asking if it was all worth it.
g. Risk – Take into consideration additional risks that are incurred in international trade: delays due to power shortages, customs inspections, weather; increased costs from surprise inspections and product modification requirements, damage from freight…
3) Supplier Evaluation
a. Suppliers – Be sure to look at wholesalers in your home country, local manufacturers, and overseas manufacturers and/or wholesalers depending on your product needs.
b. All-in-Cost and Feasibility Analysis: Use the factors mentioned in this article to:
i. Narrow down your selection of favorable suppliers
ii. Carry out a all-in-cost analysis of your favorable suppliers and maintain relationships with at least two of these. It is always better to have multiple suppliers to mitigate supply chain risks for a particular project.
iii. If conducting a break-even analysis on multiple suppliers, put a substantial risk/price premium on your overseas supplier with respect to a domestic one.
4) Expect Headaches – From experience, I’ve compiled a list of scenarios that are guaranteed to make your sourcing experience unpleasant, and most likely very unprofitable. If you are new to sourcing for overseas, do your best to avoid sourcing under the following circumstances:
a. Low price point, high customization and quality – (Especially for products with narrow quality variances for hand-manufactured products) In general, products with a cheap unit price and high customization requirement cause headaches for sourcing overseas. The more complex the product mix, the more of a headache you will have.
b. Low volume – Low volume sourcing is in general a very bad idea because in general, suppliers have fixed costs for administration and batch setups. In principal, the processing time and energy for 1000 units is the same as it is for 20,000 units. This explains why, in general, you will find only new or sub-performing suppliers willing to do low volume manufacturing. Once a supplier gets their systems and marketing in line they usually have profitable large-volume business and are no longer interested in low-volume orders. If a supplier tells you your volume is too low, take their word for it.
c. Unbelievable deal from unknown source or source without trustworthy reputation – If something seems too-good-to-be-true from an overseas supplier, you can almost bet it is an opportunity to get scammed or cheated. Be wise, get references and conduct due diligence when you hear of unbelievable deals.
d. Tight timelines – If you’re working on a first time deal with a new supplier, DO NOT take on this project if the timeline is tight. 99% of the time you will lose money.
e. Sampling from scratch – Sampling from scratch without quality designs from a professional is usually a great exercise in frustration for both you and your supplier. In general, having your designs in order before you approach a supplier will save you time and stress.
f. Not supplier’s core competency, or core direction – Unless you have a great relationship with a supplier already and they have a proven track record in expanding their repertoire, do not seek to source products from a supplier that are not part of their core competency or strategic direction.
g. Quality fade – It is common to see product quality degrade during the life of a supplier relationship. Take initiative to avoid this by making independent QC and surprise inspections part of your SOP (standard operating procedure)
h. Gray market products and fakes – Stay away from these types of products. The people who sell them usually don’t have integrity to begin with. What reason do you have to trust they will fulfill contractual obligations? Brand name products should be bought through authorized distribution channels. Fake products, especially if you know their fakes, should be avoided at all costs.
i. Poor project management – Professionals working directly with suppliers, particularly on product development, should be organized and communicate deadlines clearly and consistently. Poor project management is a great way to ruin the chance of executing your current project, and could ruin the opportunity for any potential future deals with this supplier as well.
There are a few ways to go about comparing suppliers, and this "guideline" is for comparing suppliers for a specific existing product that you consider a part of your core product line. Iit does not fully take into consideration issues such as strategic alliance, product development, systems optimization, and other concerns that come up depending on your business goals. The following steps are a great guide to minimize your risks in finding the right supplier for the product you're counting on to bring revenue to your company.
1) Know your product: It's your job to conduct due diligence on the product you're sourcing, and don't dare consider passing this responsibility off to someone else. Depending solely on your supplier or customer for this information is a sure-fire way to get burned. Know things like:
a. The product materials and technologies
b. If you can, research the raw materials prices for the market from which you're purchasing. A big delta between this and your finished product price is a red flag, if there’s not a lot of value-added done by the factory.
c. The typical production lead times it takes for this product to be manufactured according to the standard you want. If someone quotes you a product that is way below or way over the anticipated lead time, you know something is fishy
d. The most common manufacturing flaws for your kind of product: If you're doing cabinetry or staved core doors, you need to know things like how long the wood is kiln dried, and at what temperature.
e. The packaging that is appropriate for your product to be safely delivered to your destination. If you’re doing glass, you better have a standard drop-test requirement in the packaging requirements.
f. The accepted defect rate, and what constitutes a defect. Make it measurable. Hand-painted Christmas ornaments have a totally different acceptable variance than do silicon chipsets.
2) Benchmarking Your suppliers: Get past the common lazy-way of comparing suppliers: FOB unit pricing.
a. What you need to know is TOTAL COST OF BUSINESS WITH YOUR SUPPLIER. Which means you need to put together an objective criterion from the due diligence you’ve already done for your product, and apply it across the board to the suppliers you’re comparing.
b. It also means you need to know what are the CTQ (Critical to Quality) issues beyond simple product composition and pricing that you desire in a supplier. A brief list of such metrics might include:
Communication ability
Response time
Efficiency in managing your project
Payment Terms
Warranty and refund policy
Expertise in your product (if relevant)
Manufacturing time
R&D capabilities
Stock Inventory levels
Logistics Abilities and pricing
Fraud Due Diligence
a. Try to get at least 3 reference of companies who have purchased from this company before. Make sure that these are not all new customers, but customers who have been with them for a while. Ask these customers this question. “I know there’s no perfect company, so I don’t expect a perfect review from you. If you could point to a few areas of weakness in this supplier what would they be? How do you wish this supplier would improve their service to you?” If you can ask them for reference from a customer whom they have had since their business began. These are jewels.
b. Try to get reviews of this supplier from a few different associations or organizations. Be on the lookout for inconsistencies – and if you find them, ask your supplier to explain them if they are on your list of top suppliers.
c. Ask your supplier if they have any financial policies they have in place to minimize financial risk for their customers. Do they have a stated minimum working capital amount? Minimum account balances? Minimum inventory levels?
d. If possible, work with manufacturers who have sales or distribution offices in your country – this enables you to have very strong contracts. If not, visit this factory. MAKE SURE to look at the registration certificate of the factory, and confirm it matches the company name on the business cards you’ve been getting.
4) "Objectivizing" your Analysis
a. Once you've determined your critical to quality metrics and have conducted financial due diligence, use weights for each metric according to their importance to you. Then take these weights into consideration when evaluating your suppliers on these metrics.
b. Re-evaluate your new ranking for each supplier with your "gut" feeling for each supplier. I think it's important that there is a coherence between the objective criterion you're trying to create along with the intuitive impression you have for your suppliers.
5) Sampling and Testing:
a. Now, you should order samples from your preferred suppliers, and do basic product testing on these samples using tests that mimic the reasonable wear-and-tear these products are likely to experience.
6) Small Production Run:
a. Order a SMALL VOLUME order from your preferred supplier. If possible, do this from more than one supplier. This small volume order gives you real information on how well your supplier runs its business, and it tells you the risks you’ll encounter in the shipment process as well. Will your doors warp? Will the glue come apart? Will the glass break? Will the batteries corrode?
b. In this step, depending on the dollar amount of the order, you may want to hire independent QC to monitor the progress of your order.
7) Large-volume Order:
a. Now you're ready to move ahead for large-volume production with your supplier. For your first large-volume order, you should seriously consider independent QC in order to mitigate risk on this significant investment.
Keep in mind that international trade is wrought with risks. For any deal to work out well, your supplier must be solid, your logistics must be solid, your company process must be solid, and your customer’s processes must be solid. To be successful, you must minimize these risks and maximize your return on each order. It is impossible to totally eradicate risk from your sourcing operations, but with a disciplined and well-thought-out processes, you can do a lot to minimize the possibility of getting burned.
It’s not uncommon for importers to find themselves up against the wall with tight timelines for production orders in order to meet their customer timelines or projected product launch dates. If you’re not careful you could find yourself pacing the floor and begging the powers that be that you don’t run into any production hang-ups, surprise customs inspection delays, or logistical/shipping setbacks.
The truth of the matter is that there is a lot you can do to forestall these kinds of scenarios, and while you may have to take a step back to look at your business, moving to a smoother business rhythm probably takes a lot less effort than you might think. A guiding principle behind almost all business decisions should be the dollar-per hour, or “DPH” approach. One of your primary business goals should be to foster a business machine that is able to generate as many dollars per hour as possible. This means looking into your business practices for things that waste time, money, and resources, and looking to understand your sourcing activities in terms of Total Sourcing Cost, not naively sourcing based on the easiest benchmarkable variable - FOB cost. This philosophy is what guides the following recommendations to avoid these stressful “time crunch” scenarios
1) House Cleaning
a. Step Back from your business for a day and ask yourself this question: do I and my team have (and understand) a replicable, scalable process for all of our business activities? Do we have a “groove” that we get into when doing our work, or do we find that every order is an exception to some rule that we either don’t know or don’t understand? (This presupposes that you actually have a viable business plan, proper market analysis and segmentation, and enough demand to keep you profitable.)
b. Process Evaluation: Meticulously look through your processes to cut out and redefine activities that waste time, money, and resources. (A great starting point would be to look at six-sigma analysis of your process flows. See www.en.wikipedia.org/wiki/Six_Sigma ) Keep an eye on things like redundant activities, process flows with high variability, bottlenecks and constraints, “black box” activities, and unassigned tasks.
c. Evaluate “who’s on the bus”. Do you have a winning team? This doesn’t mean you must have a Harvard/MIT staff, but it does mean that they need to have the basics to help your firm succeed. In reviewing my staff, I use the simple “SAT” Analysis: Do they have the right Skills and knowledge for their job? Do they have the Aptitude and smarts to perform their role? Are they Teachable and have the right attitude? I usually find that most of the personnel problems I have are because of systems or process flow problems, and only occasionally because I have the wrong person in a position. After analyzing my processes in the past, I’ve moved employees from one department to another with the result that their work quality went from abhorrent to stellar. This ended up bolstering a core competitive advantage of our firm as well.
2) Customer Analysis and Evaluation
You may be surprised at what this step can do to reduce your stress and increase your business profitability. If your customers are disorganized and difficult to serve, this will directly impact your own processes as well as your interaction with your suppliers. Improvement in this area should directly or indirectly translate into improvement in supplier relationships.
a. Customer Profitability Analysis: Evaluate the profitability of your customers using a DPH (Dollar per Hour) type of analysis. Don’t just look at the gross margin from servicing these customers; think of the total cost of servicing them. You may find that you’re operating on a razor-thin profit margin to service customers who you thought were your bread-and-butter. Which customers eat the most time, create the most stress, and generate the least profits? Which customers have their act together, are profitable to serve, and are a pleasure to work with? You’ll likely see the “Pareto Principle” at work here – 20% of your customers will generate 80% of your profitable business activity and conversely another 20% of your customers will generate 80% of your headaches and losses.
b. Make Customers Team Members: Begin seeing your customers as part of your team, and acknowledge that it is your responsibility to manage them well.
i. If you have customers that are costing you money and have no desire to improve, drop them. It’s always a joy to hand off your biggest headaches to the competition.
ii. Look to see if you have customers who are underperforming, but have what it takes to improve. If you serve these customers well and help them improve, you may find these becoming more profitable than your current “star” customers – and more loyal as well. After going through your own “House Cleaning” you will likely find some tips that will bring instant improvement for your customers’ businesses as well. Nick Woodall, a Dallas, TX based financial consultant, is well known for saying, “If you help other people get to where they want to go, it will help you get to where you want to go.”
iii. Reward your “star” customers, anticipate their needs, and bolster your value-added to them. Treat these guys the way you would your top sales professionals. There are numerous books and web materials on customer incentives and appreciation. Your business can greatly benefit from being educated in this area of knowledge.
c. Optimize Customer Touch Points: Pay special attention to processes and Touch Points (points of interaction) with your customers. Seek to optimize these and grow an increasingly positive experience with your firm. If you weed out the chaff from the wheat in your customer base, you will find this much easier to do. Difficult or unreasonable customers that you should have let go already will make any competent customer service process impossible. (Keep in mind that if you find all of your customers difficult or unreasonable, it’s probably not your customers that are the problem.)
3) Engaging Your Suppliers For Success
After years of working with suppliers and customers, I find it amazing how many people maintain a half-hearted, ambivalent relationship with their suppliers. A good supplier is worth its weight in gold and is an integral part of your success in the value chain. Occasionally I see companies hammering their suppliers for services or product pricing that would literally drive their supplier out of business. If you find yourself burning through supplier after supplier, the following section is imperative for your sourcing success.
a. Understand Your Product: The first step to a successful relationship with your supplier is to truly understand your product. What is your product’s place in the marketplace? What are the materials and manufacturing processes that can be used for your product? I can’t tell you how frustrating it is for a supplier to get a picture of a product without any specifications and a one line question “how much?” Yet it happens every day. Suppliers need to know the CTQ (critical to quality) issues to provide you with the product you need at the appropriate price. If you’re shooting out a generic RFQ for a poorly defined product, you’re playing Russian roulette with your business.
b. Pick any Two: An old business mentor of mine told me an old adage that has proven true time and time again. All things being equal, you have three metrics that constitute the value a supplier can give you: good, fast, and cheap. 99.99% of the time, you have to choose between two of these. You want a good product and you want it fast? Don’t expect it to be cheap. You get the picture. Know in advance what your priorities are here, and it will serve you when you move to accurately evaluate your suppliers. If by some miracle, you find someone who can do all three, read the customer analysis section above, and make sure you’re one of their best customers!
c. Accurate Evaluation: Accurately evaluate suppliers in terms of value, not just FOB cost. You’ll need to shift your thinking from mere product costs, to the total cost of doing business.
i. Total Value: If a product costs USD3.25 from one supplier, and USD2.95 from another, but working with the latter would mean a lot more work, it’s your job to analyze the actual cost of that work. How much time does it take to negotiate, process, inspect, and procure the deal? How much is the total shipping cost for each of these products? (This can be tricky if they’re from different ports and using different 3PL companies.) I’ve seen some suppliers mildly competitive on FOB pricing, but significantly competitive on DDU pricing.
ii. Supplier Ability: Make sure you’re comparing apples to apples. If you’re looking at two or more suppliers for the same product and see a huge price differentiation, you’re probably overlooking something significant. While evaluating your suppliers, take some time to evaluate your target market requirements as well. If your own quality requirements surpass those of your market, you could end up paying too much for your product and end up being uncompetitive. Once you determine the CTQ issues for a product, look for the suppliers who have the current ability to handle your product. Some suppliers may have latent ability and are teachable. These are good to keep in touch with and help them grow AFTER you secure a solid supply base.
iii. Supplier Added Ability: Don’t just evaluate your supplier’s manufacturing ability, look into their abilities in terms of complementary and ancillary products that match your current product needs. Do they have resources for packaging and add-ons that would add value to your product in the marketplace? If you’re sourcing engraved wood boxes for wine bottles, do they also have resources for other wine-related accessories at competitive pricing? One great find that is often overlooked is a supplier that can help you coordinate production with other suppliers and also help you consolidate shipments.
d. Supplier Integration: Once you’ve found a supplier who can meet your product and value requirements, you’ve only gotten your feet wet in terms of maximizing the potential of this relationship. The next step is to integrate the activities of your two firms to create new value that could really boost your firm’s position in the market.
i. Touch Point Integration: The first place to start would be process integration in the Touch Points of your companies. That is, look to standardize the way your companies work together. You may find that your supplier actually has to rewrite your PO forms for production use, and by changing your format you actually save a day of production time. Do you require status updates for production progress? Why not have a single template that centralizes the progress of all orders and product development activities? Or better yet, make it web-based.
ii. Communication Standardization: Look to standardize key terms used to describe your product features. Decide on an email policy that would help minimize useless ramble and get to the heart of issues. My office utilizes a template for subject lines that helps us prioritize and file emails accordingly. Set up weekly appointments to review your orders and product developments if necessary. These meetings should be planned with a strict agenda and an action list should be emailed to all participants immediately afterwards. Begin the next meeting with a review of the action list from the last meeting.
iii. Production and Know-How Integration: Once you’ve solidified communication and touch point integration, the next step is to begin a know-how and process exchange between you and your supplier. Last year, I worked with a supplier of cast-iron bottle openers and after looking at his production process and product characteristics, we were able to help him solve a key product defect and reduce production time significantly. By integrating processes and know-how, you will have set an excellent foundation for both organizations to grow by not only enhancing current efficiencies, but by also “growing the pie” with product and service enhancements and new offerings.
This article is published on www.alibaba.com with permission from Rob Bailey and Convergent Sourcing Limited. All other reproduction of this article without permission is prohibited. Copyright Notice © 2006-2008 Convergent Sourcing Limited. www.convergentsourcing.com
