Over the past several years of sourcing products in Asia , I’ve seen an increasing need for purchasers to effectively evaluate the advantages of sourcing domestically vs. sourcing overseas. Without properly weighing the trade-offs involved in these options, purchasers may find themselves erring on either two ends of the spectrum: paying way too much for a product from a domestic supply, or spinning their wheels trying to source a product from overseas under the misconception that they are getting a better deal. The following guide is a great resource to help purchasers think through which projects are best executed domestically and which are best outsourced to overseas suppliers.

 

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

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.

Packaging – Packaging is a core component of your product, and plays an integral role in its pricepoint and market placement.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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…

Supplier Evaluation

Suppliers – Be sure to look at wholesalers in your home country, local manufacturers, and overseas manufacturers and/or wholesalers depending on your product needs.

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.

   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:

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.

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.

     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.

    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.

     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.

    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.

    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)

       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.

     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.

 This is something that needs to be read by anyone looking for manufacturing and or just buying products.   Great article!!!!

Best regards,

Ranger

Great article ! Well-done !!

We're also working as a purchaser in China. Sometimes it's hard to control the quality before delivery when we're buying from overseas market. So we normally work with a local third-party service company like SGS etc to help us do more Due Diligence work.

Thank you for for your information and we're sure to learn more from you later.

Thanks Rob....great article. This should definitely be stuck to the top of the forum as it a must read for everyone.

I really like the way that you point out the hidden costs of dealing with unsuitable suppliers. This is something that almost every one would overlook...especially new comers!