Walmart Reinvents the Milk Carton - Adjusting Packaging to Increase Efficiencies

SourceJuice recently wrote an article 4 Ways to Combat China Price Increases without Raising Prices to your Customer. Number 1 on our list was ‘Adjust Your Packaging Size, Colors and Materials’. While this may seem obvious on the surface, a recent example is sure to prove the point… that truly rethinking your product’s packaging can increase efficiencies and lower production and delivery costs.

The example is the 1 gallon milk jug and the forces behind the change are Walmart and Costco. The 1 gallon milk jug is a product that everyone, at least in the United States, is familiar with. We’ve grown up with it. Most people probably wouldn’t have ever thought about changing it. However with milk for the most part mass produced and trucked hundreds or thousands of miles to its final destination, the milk jug really isn’t the ideal packaging. So what are the changes exactly?

Superior Daily is the company responsible for designing the new jug and they’ve put together an excellent chart explaining all the benefits of the new milk jug compared to the old one. Click the chart below to make it larger.

Is everyone loving the new packaging? Of course not. Some people are claiming that it’s harder to pour. Others are loving the new jug, particularly how it fits in the door panel of modern refirgerators. Either way, with the new jug reportedly saving about 20 cents per gallon of milk, they’re unlikely to be going away anytime soon.

“This is a key strategy as a path forward,” said Anne Johnson, the director of the Sustainable Packaging Coalition, a project of the nonprofit group GreenBlue. “Re-examining, ‘What are the materials we are using? How are we using them? And where do they go ultimately?’ ”

So what are you doing to rethink your packaging?!?

Establishing a Sourcing Entity in China

China is in a constant state of flux, and the legal environment is certainly not immune to this reality. As a foreigner your behavior is often scrutinized more than a local so you need to constantly be aware of the legal bounds under which you and your business operate. This article attempts to provide an overview of typical legal set-up options for a sourcing company in China, including RO (Representative Office), WFOE (Wholly Foreign Owned Enterprise) and FICE (Foreign Invested Commercial Enterprise).

Choosing the proper set-up

The overall objectives of your operation are the most significant aspect to consider when establishing an entity in China. What are your short and long term goals? What types of products do you want to source? Do you want to distribute, assemble, or manufacture products domestically? Do you plan on employing local staff? The answers to these and other questions will help define your objectives so that you can formulate a legal strategy that best serves them.

It is important to note, that no one legal solution exists to accommodate all of your unique conditions. Therefore, the more detailed your understanding of your objectives, the better equipped you are to make good decisions. Further supplementing your understanding with proper due diligence is always important when making decisions of such lasting consequence. Let us now take a look at typical legal set-ups for trading companies.

Representative Office (RO)

This formation is popular because (1) the registration process is shorter in duration and usually easier to complete, and (2) there is no minimum level of capital investment required. An RO will be suitable if its planned functions are simply liaison, market promotion or research. For sourcing companies, it will mean you have to give up a significant amount of control over your operations. All transactions must originate from abroad, and you are required by Chinese laws to heavily rely on 3rd party services providers, such as an Import/Export agent, Logistics provider, and HR outsourcing agent.

International Trading Wholly Foreign-Owned Enterprise (WFOE)

With official minimum registered capital of RMB 100,000 for a single shareholder company (but closer to USD 60,000 to 70,000 in practice), an International Trading WFOE allows added control over your business operations. However, the enterprise must be located in a Free Trade Zone (FTZ) and it is usually limited to export activities. Those that wish to distribute within China must either use a 3rd party distributor or apply for a separate import/export license (which essentially qualifies them as a FICE in a FTZ).

Foreign-Invested Commercial Enterprise (FICE)

Unlike the Trading WFOE, a FICE has the ability to import and locally distribute on top of export activities and may also qualify for retail activities. Both have the same level of required minimum investment, but in practice the FICE necessitates substantially higher levels (about USD140,000). The registration process is also more complex compared to that of a trading WFOE. A major issue to consider when evaluating the advantages of a FICE is location. Specifically, operating inside or outside of a Free Trade Zone significantly alters the investors options.

FICE inside a Free Trade Zone

A FICE operating inside a FTZ enjoys freedom in its business scope, but at a price. The FICE is unlimited in terms of what can be traded so long as it does not belong to a prohibited trade category according to the Chinese laws. A major drawback from operating inside the FTZ is that VAT invoices can only be issued through the relevant governing authority, creating a fair bit of logistical hassle. Additionally, you will undoubtedly pay a premium to exist in the FTZ - costs of services, talent, office space, etc tend to be higher. Finally, it will be more difficult to establish branch offices in other locations.

FICE outside a Free Trade Zone

Outside a FTZ, a FICE’s trade activities are limited to those relevant to its stated business scope. But it also enjoys some advantages. Unlike operating in a FTZ, the FICE is able to issue its own VAT invoices, operational costs may be significantly less, and branch offices can be set up more flexibly.

Manufacturing + FICE

Enterprises looking to incorporate manufacturing activities with its trading business can explore setting up a Manufacturing entity with an extended FICE status. However, such entities must maintain an above-50% revenue stream through its manufacturing activities. Historically, this requirement acts as a measure to prevent enterprises from abusing such entity status to access preferential tax policies granted to manufacturing enterprises. Even though the new corporate tax law has scrapped most of such preferential treatment, the authorities may still scrutinize enterprises enjoying tax incentives due to their encouraged status (eg. High and New Tech Enterprises).

Business registration is a complex process that involves navigating China’s far-reaching bureaucracy. While it is not compulsory, using a specialist service that understands not only the legal environment, but also the objectives of your business is highly recommended. Selecting the optimal legal entity from the beginning is crucial to your success in China. Don’t proceed without a thorough understanding of the legal implications of your actions.

For regular news and updates about China’s business environment, check out and subscribe to JLJ’s monthly newsletter here.

For more information on establishing a sourcing entity in China, please contact:
Ms Lynn Ng
Manager, The JLJ Group
Email: lynn.ng@jljgroup.com
Tel: +86 21 5211 0068 ext 821

This article is contributed by The JLJ Group – a one-stop service provider assisting foreign companies to enter and grow in China. Over the past ten years, JLJ has assisted more than 400 international clients with their China entry and growth projects. Their client base includes Multinational Companies, Small & Medium Enterprises, Government Organizations as well as individual investors from more than 30 countries in Americas, Europe and Asia-Pacific.

Contacting a Factory Online; Lessons Learned from the Field

Contacting a factory online is very common, especially with the growth on online directories such as Global Sources and Alibaba. However when most buyers contact a factory online using these websites, they are often frustrated by their experience.

Many buyers complain that the factories don’t respond to requests for information or requests for quotes quickly, if at all. Other buyers complain that when they do receive a response, the emails are very brief, don’t include the requested price quotes, don’t answer the questions that were asked, and in general don’t inspire confidence that the factory can meet the buyer’s requirements.

On a clear bright day in the spring of 2005, we made a decision to look East to procure building materials. At the time, real estate development in the United States was growing very fast as an industry. In particular, converting apartment buildings into condominiums was big business. We decided to launch Parkview Industries, which would help to increase our profit margins by importing building materials from China by acting as a distributor to our existing real estate development business.

Our top 5 qualifications when evaluating a potential factory were

1. They had to have unique products.
2. Specific models we were interested in needed to be available.
3. The price had to be low. (After all, it always comes down to this in the end!)
4. Ability to accommodate all export/logistics for the shipment was important to us as we didn’t have previous experience.
5. Future capability for private label opportunities was important to us because we were considering starting our own brands.
6. References needed to be available for review.

We learned very quickly that in fact we were not only qualifying factories but also that the factories were qualifying us as buyers. The factories we took the time to develop a relationship with were much more forthcoming with information and price quotes. The factories that were not convinced in our ability to put containers on the ocean were much less helpful.

At first we thought ‘well if a factory doesn’t want us as a buyer, then that’s their problem’. However in fact, the reality is that these are sometimes the better factories, and they are nervous that you might be a competitor just trying to get their pricing information.

When making initial contact with a factory online, keep in mind the following

1. You are not only qualifying the factory; the factory is also qualifying you as a buyer. Validating your company in the minds of the supplier is of the utmost importance.
2. The initial communication, preferably through email, should include a brief introduction to your company, your position within the company, and include a statement of adequate buying power resources.
3. Showcase your company with a polished website illustrating your industry and experience. The site should generate a logical understanding, in the mind of the reader, of why your company would be interested in manufacturing in China.
4. Ensure the email asks for the specific information you require. For example, you may ask, “May I please have a price quote for item …” or “What is your sample availability and process?”
5. Include the specific item or model numbers you are interested in, attach pictures from the factory’s website or other sources, and in general be as specific as possible with your requests.
6. Indicate available contact methods for further communication (MSN, Skype, email, phone). In addition to email, most Chinese factories are on Skype and MSN and this sometimes is better than email because the “back and forth” is quicker, once an initial relationship is already developed.

Given the experiences we have had with sourcing over the internet, there’s a lot more to each point we have made here in this article. We will expand on the key lessons presented here in an upcoming article that provides detail on what we learned and how it helped find us both good and bad suppliers. Stay tuned and thanks for visiting.

4 Ways to Combat China Price Increases without Raising Prices to your Customer

Inflation in China is soaring and price increases are being exported to the developed world. Customers are finding that factories are increasing prices almost weekly or biweekly depending on the product. Customers requiring their price quotes in US Dollars are finding their quotes only good for one or two weeks.

On the other hand, your distributor or wholesale customers will not accept price increases every week, nor if you’re involved in retail will the final consumer accept this. Even if they did accept the price increases, it’s not cheap to update your catalogues, your websites, re-train staff, etc. Given the fact that inflation is real and that prices will increase, how can you best plan for this and minimize the negative effects to your business? Readers of SourceJuice are sending emails, asking what we recommend to help them through these difficult times.

SourceJuice recommends you to take a good look at the products you’re selling and sourcing and do an analysis of ways you can decrease production costs, while still maintaining the quality of your products. We’ve developed a top 4 list that can help get you started with your analysis.

1. Adjust Your Packaging Size, Colors and Materials
Packaging often makes up a significant cost of the final good you’re manufacturing or sourcing. There are many ways to adjust your packaging that can help you save on costs without affecting the final product, and possibly not even the perception of your product in the marketplace.

Are you using a metal case? Steel and other metals have increased in cost drastically. If you’re using metal in your packaging, can you switch to plastic? Can you produce a slightly thinner case if you need to continue using metal?

Regarding colors, printing in many colors and with varying textures can add considerable cost. Can you decrease the number of colors or textures in your packaging?

Regarding size, can you make your package smaller? Can you take out some layers of packaging? Can you requiring a smaller number of different materials to be used, thus gaining economies of scale and simplified assembly?

2. Decrease Transport Distance Required for Final Assembly
The price of oil and thus transportation is increasing. With oil now well over $130USD per barrel, look for ways to reduce transportation distances. The most obvious example is to source closer to your final customer. However, even when you need to ship the final product long distances, you may still be able to optimize your supply chain here.

For example, do you manufacture a final product that requires the assembly of components from multiple factories in multiple locations?

If yes, you might consider consolidating your factories within more of a reasonable distance. We’ve seen customers make their final product in Guangdong province but they have a ‘legacy’ factory in Tianjin for one of the components. Each time they want to run of a line of product, they must ship goods from Tianjin to Dongguan by rail or road. Once they relocate this factory to near Dongguan, they will save themselves costs on shipping as well as time.

3. Cut Out the Middleman
Trading companies and 3rd party companies have their place, especially when they act as project managers and quality assurance specialists.

However if your product requires multiple components and you are purchasing some components from trading companies that aren’t adding value, cut them out! Moving further back on the supply chain and working directly with factories will help you to get the lowest cost possible.

4. Push Back on Price Increases
Do not just accept any price increase that a vendor or factory comes back to you with. You need to make sure that the increases they are requesting are legitimate.

For example, if the price is increasing because of a VAT rebate reduction, you should reference the VAT rebate chart to confirm your product is actually effected. You should also try to have the factory prove to you that they actually even paid VAT in the first place, as many factories don’t and are using this issue as a way to increase profits.

With regards to currency fluctuations affecting price increases, try to start having the prices quoted in Chinese Yuan (RMB). Yes, you will still experience fluctuations in price, but these will be market driven as opposed to having to renegotiate prices regularly with the factory.

Additionally, if price changes are because of raw materials cost increases, reference back to global prices and make sure that the increase your factory is quoting you is in line, at least within a reasonable percentage, to the changes in the global market for that commodity.

Supplier Diversification and Your Exit Strategy

Having selected a factory and developed your product in China is only the first step in your sourcing process. It is important to diversify your supplier base. Throughout the procurement process, there will be times when unexpected delays can turn into extra months for producing deliverables. The natural process is to accept the reasons for delay and “hope for the best”. When doing business in China, having patience with your supplier is not always the best method for action.

It is important to lay out strategic plans of action with measurable milestones. See your end goal and put the invested emotional quotient aside. In conjunction with these plans, penalties for lack of execution on both sides must be implemented. Enforce these penalties, but also expect to negotiate during the time for payment. During an import venture mentioned below, the supplier had to come to the table with a signed contract entitling me a 65% discount.

While the delays were excessive, you cannot expect the supplier to lose all profit and even material/labor costs. If communication has broken down, take the high road coming to the table with an understanding of the supplier’s perspective, but only to the degree of reasonable doubt on the reasons for the delay. Do not take the reasons for the delays at face value.

Other common schools of action are complaining (many of us do this in the wrong manner) and while this will put new thinking in the minds of your supplier (that you will not accept further future delays), the deed has already been done. Maintaining the right kind of respectful relationship is key to any business endeavor (or even personal relationship) and complaining in the wrong way can damage this fragile, long distance relationship.

The foundation for my understanding of the business principles, included in this article, in China, was derived from a venture into importing private label modular cabinetry. In my case an intermediary was engaged to resolve some of supplier problems. Read in detail my experiences in this area and specific actionable items in Avoid the Middleman and Seek the Intermediary.

My experience in producing cabinetry in China tells me that having an exit strategy is key to making a bad situation transcend the fundamentals of a failed import venture. If you have selected the wrong supplier, the first delay is not the end, but only the beginning.

There are times when the smart business decision is to cut your losses for the time being, regroup and engage your second supplier. The supplier always has the upper hand in your dealings with them. They have your deposit, you need the product and having to switch suppliers midstream would incur delays and costs. This balance of power can be flipped if you are open to turning the tables with diversification.

If the end result is obtaining the product in the required schedule, the second supplier you had lined up may be your lifeline. In the mean time, you can resolve issues with the current factory and complete the order post the newly engaged factory delivers. This scenario works if you will need additional inventory or you can negotiate with the current supplier to reduce order due to your delays and having to engage the other supplier to accomplish the endgame.

Should You Diversify Your Supplier Base?

It takes time to develop a successful relationship with suppliers. For many importers, once this relationship is stable, they are hesitant to keep looking for other factories to produce the same product. There are certainly benefits to working with as few suppliers as possible such as gaining economies of scale, stability in terms of quality assurance and predictability as far as shipping schedules.

However, with the recent inflation in China, partly due to decreases in VAT rebates, many factories are raising costs hand over fist. When a factory decides to raise your costs, you have 3 options:

1. Eat it - You need the product. You have no other options.
2. Try to Negotiate - Perhaps you can knock the price down a bit; however, you will still agree to a price increase and you have no real way of knowing whether the price increase is reasonable.
3. You’re Prepared with Alternative Factories - You’ve got secondary suppliers that could take up part of (or all of) future orders. You can play your suppliers off of each other, dangling carrots as necessary, and make sure that the price increases are reasonable.

Jason Busch at Spend Matters, adds an additional insight on why you should diversify your suppliers in his article Split of Business: The Best Sourcing Justification for Supplier Diversity?

By dangling the carrot of additional business out to the secondary suppliers, a buying organization can get them to invest more in the relationship than they otherwise would. Out of this might even come joint innovations or even new product ideas.

And at the end of the day, aren’t we all looking for better, more interesting products (at cheaper prices)?

The Right Suppliers at the Right Price; RFQ Strategy and Cultural Considerations

Finding the best supplier to manufacture your product and negotiating the best price can be a lengthy process requiring a great deal of research, a bit of strategy, a dash of cultural understanding and perhaps even a touch of luck.

We came across an interesting company called PassageMaker, headed by a gentleman from the United States named Mike Bellamy. According to their website, in 2006 PassageMaker became the first (and perhaps only) medium sized, 100% US-owned, assembly/inspection company in Shenzhen possessing the following: In-house licensed custom’s brokers, Full import-export rights, and authorization by the Chinese government to process Value Added Tax (VAT) rebates.

Mike has done some speaking engagements over the past few years and one of them is titled, “Sourcing Strategies - Find the right suppliers, assure quality and avoid knock-offs on a limited budget”. The videos are posted on YouTube in 4 ten minute clips. We’ve watched the first two, which are quite good, and have our ‘takeaway notes’ for our readers to review. In addition, we’ll post links to the videos below for easy access.

GENERAL

1. China, although uniquely different from the West, is very open to western business practices and you should not be worried about cultural mistakes. The Chinese don’t expect you to know their culture or language and are very forgiving of mistakes and cultural misunderstandings.

2. There are many factories that make excellent products but aren’t good at marketing themselves to the world. There are other companies that are excellent at marketing but aren’t factories themselves and misrepresent themselves to potential customers to win deals.

3. The areas to focus on are the Pearl River Delta which is in the Hong Kong/Guangzhou area and the Yangtze River Delta around ZheZhang and Shanghai. They both have different histories. The Pearl River Delta was designed from day 1 for manufacturing for export. The Shanghai area has a long history of manufacturing but developed to service the internal market.

4. How to qualify a vendor on a limited budget - use web directories and trade shows to find new suppliers but visiting the production area and walking the line is the only way to see that they really make the product.

5. The issue with dealing with trading companies is that there is no direct line of communication when there is a problem. Trading companies may not understand the product as well as the factory and may not be able to handle the issues that arise.

6. Hold negotiations at the factory. To see if they’re really making the product, try to spend as much time at the factory as possible. Look for signs you’re being duped such as the business card addresses of all the people not matching or if the person who is giving the tour of the factory doesn’t seem to know all the people.

COSTS

1. Tooling and setup costs should be quoted separately and compare the quality of the tooling among factories. Often longer lead times are required for better quality tools with higher grade materials such as steel.

2. Gather your quotes using the same incoterms - Mike prefers to use EXW (Ex works), which essentially means ‘finished and available at the factory’. SourceJuice wrote an article comparing FOB and CIF, detailing what’s included and what’s not.

3. Be clear on your quality standards and acceptable levels of defects as this may significantly affect pricing and you want to be able to compare applies to apples across factories.

4. Specify the grade of the materials in your bill of materials. There are many grades of metals and plastics and you need to be clear!

5. Ask them to identify their VAT structure. Some of the smaller suppliers are not paying VAT on raw material purchases and thus not getting the rebate when they export. This is ok for small quantities but when you need to ramp up, they may not be able to keep the same deal. In this case, you can expect a spike of 10% or more! For large companies, if you dont ask about the VAT refund, they may pocket it. For more information on the recent changes (and a general explanation) on VAT rebates, check out the SourceJuice article 4 Reasons Why Sourcing in China Will be More Expensive in 2008.

NEGOTIATIONS

1. Orient yourself towards the decision maker and not necessarily the guy who understands you best because of language.

2. The guy at the top usually doesn’t speak as much English since he’s older and grew up when China was a closed society.

3. Watch the Bai Jiu!!! For those who don’t know, Bai Jiu is a traditional Chinese alcohol made from rice. It’s very strong and it’s typically part of dinner banquets and can be abused easily with repeated calls for toasts. You don’t want a lopsided agreement and if you start to drink and then stop you may offend. Better to just say you’re allergic or that you can’t drink. Mike commented that he brings a bottle of tequila and when they do Bai Jiu shots, Mike requests that everyone do a tequila shot! That stops the drinking!

4. If you’re looking for a little strategy, bring a translator with you even if you or your colleagues speak Chinese. Don’t speak any Chinese during the negotiations. After a round of price discussions, the translator should excuse herself to go to the bathroom. The Chinese factory may continue to talk about pricing strategy with you in the room. — Just be sure they don’t pull this on you with English!

TRANSLATION

1. Use a professional translator who is familiar with your field if you don’t speak Chinese!

2. Go over the technical terms in advance and make sure you’re in sync. Otherwise your translator may not know the details of what you’re trying to communicate.

Is “Guanxi” still needed in China?

Guanxi in Chinese means “relationships” and most foreigners and Chinese alike will assure you of the need to have good Guanxi to get business done in China. While I doubt anyone who has done business or lived in China will argue that relationships aren’t necessary here, Shawn He Yuxun, from MeetChinaBiz offers some excellent insight in his blog post into the history of this infamous word Guanxi, its place within China historically and what place Guanxi may have in the future.

In his post, Shawn He Yuxun discusses the history of Guanxi as it relates to requiring personal favors to achieve economic means during a time when China’s economy was completely planned.

Prior to the 1980s, every aspect of China’s economic life was planned, controlled, directed and operated by the government. No private ownership of any property or asset, much less profiteering for an individual or group, was allowed. The government would allocate everyone a pre-defined slice of the “big pie“ (incidentally the equivalent terminology in China — where rice rules the dining table — was “Da Guo Fan“ (da-gore-fun), which means “rice in a big wok“). If one wanted any more than what was allocated to him/her, he/she would have to circumvent the system and rely on another individual in charge of a particular function in that “allocation chain” to do him/her a special favor.

As China began opening up in the 70’s, there was no effective system in place to foster individual economic relationships outside of the planned economy and this Guanxi system.

So by and large throughout the 80’s and most of the 90’s, having Guanxi this “ultra-relationship” or “super-connection“ ALONE had proven to be a sufficient, and in many cases also necessary, condition to get something done, regardless of the fundamentals. With Guanxi, a completely unqualified and incompetent person could land a very important job and/or position. Also with Guanxi, a company with no track record whatsoever could be awarded massive contracts. You get the point…

However, Shawn He Yuxun argues that as certain industries become more privatized, and with a history of economic relationships built outside of the Guanxi system, that Guanxi itself is less important. “Business is business” just like in the west.

As the economy becomes more and more marketized / privatized and competitive, the value and effectiveness of the Guanxi system has also greatly deterioriated. In industries that have been substantially deregulated / privatized or where there is much competition, business is business, and Guanxi has been neutralized / marginalized to resemble just what relationships and connections are like in the Western world.

So what do you think? Is Guanxi still required in China? Is the Guanxi of today different from the Guanxi of yesterday? Let’s hear from our readers about your experiences!

Beware the Middleman and Seek the Intermediary

So you come across what seems to be a stroke of good fortune. A company having experience in making your product and after calculating your landed price are once again surprised at how cost effective it is to manufacture goods in China. There is no substitute for traveling to tour the factory, but depending on your situation, you may not have the opportunity to visit. Having received some literature, a sample and verified the company’s references, what else can you do? What is the worst that can happen? Let me tell you the pitfalls and learn from my experience importing a new product, from a new company, for the first time.

This is a story as much about the intermediary as it is about the middleman. Both are important aspects to consider in the importing process. Both will cost you money and increase your landed price, but only one will add value.

Sourcing Companies vs. The Source
There are an unlimited amount of companies in China that represent themselves as the manufacturer and they can, at times, make it hard to make the distinction. These companies can do some of the leg-work for you of having to locate the manufacturer in person or on the internet. They can be useful in that they are creating a “one stop shop” to find and purchase all of your goods. Sourcing companies have created partnerships or special pricing agreements with the different manufacturers and in turn resell the goods to you. While I have found a number of sourcing companies that are useful, it is best to go right to the source. One issue, is that without dealing with the source, you do not know who or how your products are really getting produced and under what circumstances. Secondarily, if you have problems with your goods, you are going to have to deal with the source through another company (or two possibly – you just don’t know). Another important detail is that without dealing with the source, you cannot be sure that this isn’t the first time they have built your product. As in my situation, the company had produced similar “wood” products like front doors and figured that was enough expertise to build “wood” kitchen cabinets. As with many things in China, the country is amazing at being able to accomplish extraordinary feats of “Magic” that may not have ever been done before or at that scale. This can sometimes be dangerous for the consumer.

It is important to note that it is only good business ethic to do a trial run of any product you import for the first time at your own risk and not the clients’. This is the case for my venture into producing modular kitchen cabinets to add to our private label product line.

Pre-Manufacturing Design
One of the issues with working with the middleman or sourcing company/agency is that they may be knowledgeable about a wide variety of products, but not intricately experienced in any of them. By unknowingly using a sourcing company, I opened myself up to an extraordinary amount of work early on in my kitchen cabinet manufacturing venture. Aside from putting together kitchen cabinet layouts, order lists and color/style selections I immediately found myself in a storm of pre-manufacturing design related conversations with the “manufacturer”. The questions I was being presented with are ones that should already be known as industry standard specifications for a product. Check it out, an actual diagram from the sourcing company asking design related details to cabinet construction. It gets much worse, but you get the idea.

Delays & Intermediaries
Suffice it to say, design wasn’t the only head-ache, delays were inevitable. Production was looking to run past a year and I encountered excuses about material shortages, issues with paint drying due to the rainy season and hardware not arriving on schedule. I had no way to confirm production was actually moving according to the emails I am receiving. At the same time I was expected to make progress payments on the manufacturing. I became skeptical if I would ever receive the order when I asked that a sample door be produced, completed ahead of the order as to confirm quality and mailed to me. This was nothing more than an attempt to satisfy my curiosity of their actual progress. Additional excuses followed and with a 20% deposit on the line, I contracted an intermediary to do some due diligence on the company. The World Trade Group has offices here in the US and in various places in China. This is important as you have a local contact in both places in which to interface, send documents, etc. For a consulting fee they are able to fly a consultant out from a city in China to your factory and give us a detailed report with photos. This was invaluable in that for the first time we were able to get a vivid picture of exactly what and who we were dealing with.

Their Findings
The report from the World Trade Group confirmed that the factory was not being truthful as to the nature for the lengthy delays. By the time of their arrival, it was claimed my sample doors had “just shipped out” express mail. By hiring a consultant, we were able to reopen communications with the sourcing company since talks had broken down months prior. They also were able to begin to negotiate for a hard ETA on completing production and had a backup plan if they were not successful. Lets look at some of the details from the report. The report outlined an actual timeline of events generated from email correspondence on both sides. Also included was a description of the company outlining that it had been in business for ten years exporting wood doors and had started their new cabinetry product offering shipping only to Europe. There were six factories that the sourcing company was working with, each without a sign identifying who owned the factory or their affiliation. All finishing/paint coating was to be subcontracted, but at the time of the inspection by WTG, no contractor had been selected.

All door and drawer panels had been completed and stacked in the corner.

Of course reviewing all of this information gave me a false sense of security that everything will go on schedule from this point forward. As a contingency for further issues, a hard date was set for shipment and terms for late delivery established. WTG continued to monitor communications and status of shipment and when the factory again failed to meet deadlines, intervened. Due to the terms of our agreement, the shipment was so late that we had to again negotiate an acceptable discount even though we had an agreement in place.

Arrival/Conclusion
The order exceeded a year to conclude and with only one of the two containers finally shipped. At the final point, it was decided to have the cabinets painted and finished here in the United States for fear they would never be completed. The World Trade Group or other companies alike are essential in conducting business from the US. They provide a cost effective alternative to source new products, evaluate factories of interest, provide quality assurance measures, confirm integrity of products before shipment or mediate an already bad situation.

dylan@sourcejuice.com

31 Steps to Negotiating With Chinese Factories

Rarely do we come across such a solid article on a complex topic like Negotiating With Chinese Factories. However Silk Road International certainly raised the bar on this one. David Dayton who is the owner of Silk Road International lives in the same city we have our office in, Shenzhen.

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