Are you frustrated sourcing from China? Do you find communicating with Chinese suppliers daunting? As Amazon FBA and PL sellers, online sellers, and small business importers you know that time is at a premium. By applying the 80/20 rule, I will teach you how to effectively and efficiently source from China. Learn best practices from the pros, avoid common mistakes, and find out what NOT to do so you can build a 7-figure business
I had the privilege of being invited to Jungle Scout’s Million Dollar Case Study with Greg Mercer to share sourcing best practices on how I would source their product. Here’s the replay in case you missed it. We covered a ton of high value material on what to look for in a good supplier (and how to avoid the bad ones), how to use Alibaba, and how to negotiate pricing and payment terms.
I’m curious – what’s the #1 pain point you’re facing with sourcing right now? I’d like to help.
-Gary
Outline:
[07:00] Finding a trustworthy supplier is like dating.. how to be successful
[09:44] What would a supplier look for in a buyer?
[10:32] Gary’s surprised that nobody mentions one of the key factors that instantly gets the attention of suppliers
[13:25] The 3 parts to a Request for Quotation (RFQ)
[15:07] Gary breaks down a RFQ for baby towels
[18:35] How to evaluate suppliers and responses… 80/20 rule!
[20:00] Where do I find suppliers?
[20:45] The Art of Alibaba
[21:15] The Yin and the Yang of a Good Supplier.. Hard Skills balanced with Soft Skills
[22:36] What to look for in a good supplier on Alibaba
[25:33] Signs of a bad supplier fit
[30:30] How to negotiate pricing – Gary and Greg’s views
[33:45] Walkthrough of how to use Alibaba to find baby towels
[39:23] Gary finds a trading company on Alibaba
[44:50] The common thread test
[46:00] What are the top things Gary looks for in a supplier on Alibaba?
[48:30] Don’t believe what you see – Pictures online and even samples in the showroom don’t necessarily reflect the supplier’s manufacturing capabilities
[50:47] How to track responses from suppliers
[52:00] Communications best practices – Alibaba, email, WeChat
[53:50] How to reduce risks when paying suppliers – PayPal and Bank Transfer (T/T)
[56:33] How to negotiate payment terms
[61:00] How many responses would you expect if you contacted 20 suppliers on Alibaba
[62:28] How to arrange Quality Control – Order inspections
UPDATE: Get your sourcing bonus pack and signup for my free newsletter here
What do you think of first when negotiating with suppliers? Do dollars signs come into your head? Price right? But did you know there is another factor which can make or break your business and it is often overlooked? In fact by negotiating this properly you will have more money to pay expenses, pay yourself, or invest back into your business, cut your risk of losing that money, and gain leverage if any problems arise.
Payment Terms
In summary, by negotiating the right payment terms you can score these wins:
Maximize your cash flow
Minimize the risk of losing your money
Gain leverage against the supplier if you encounter quality problems
What are Payment Terms? Payment terms are the designated amounts of money you pay the supplier at various points in time. This process begins from when a purchase order is placed, through production, to delivery. In other words, this is how much of the order value you will pay at various points of time throughout the production process.
Long story short, the less you pay upfront, the more cash you will have on hand, the less cash you are risking, and the more leverage you have in case there’s any problems with the order.
For example, for sample orders it’s common to pay 100% upfront because not only is the value is so little , this also quickly gets the supplier started with production and delivery.
On the other hand, you should be more careful with trial orders since several thousands of dollars can be at stake. Moreover, when working with a new supplier I suggest to always err on the side of caution. For initial orders, I normally negotiate payment terms of 30% or 50% advance payment and the balance due after inspection before shipment.
You might be thinking – Why do I need to pay anything at all at the start of production? Well if you are not a large well-known buyer (e.g. Walmart, Target) then in order to get the suppliers interested in doing business with you, they are inclined to reduce their risk by collecting an advance payment when you place the order. This payment will help offset their costs to purchase raw materials and the logistics of moving them to the factory as well as to pay their workers’ salaries as production begins. After the order is completed, the balance is then paid ideally after an inspection assuming the buyer is satisfied with the product quality.
Why negotiate payment terms?
First off it’s in your best interest to negotiate payment terms to defer partial payment later so you can increase your cash flow. This means you have more working capital to pay expenses, your salary, or invest it back into your business. For example by negotiating payment terms of 30/70 and deferring 70% of the balance until after production, you have another 30-45 days to make that money work for you.
Secondly as a buyer, the more capital you have tied up early in the production cycle the more risk you are taking in case anything goes wrong.
Common rookie mistake: When dealing with large orders, if you pay 100% advance you are taking on a lot of risk. For example if the supplier suddenly closes shop and stops responding, there’s not much you can do to get your money back. Also if there are any problems with the product discovered later and you have already paid them 100% you don’t have much leverage to get them to fix the problem.
Conversely, if you’ve negotiated payment terms so that you are withholding payment until the product passes an inspection, then you have LEVERAGE to ask the supplier to fix these problems. In other words, the buyer can say: “fix these problems or else you’re not gonna get paid!”
When can I negotiate Payment Terms?
Similar to pricing, payment terms can be negotiated throughout the life of the business relationship.
The pre-order negotiations phase is the first opportunity to stake your position in the battle of payment terms. Keep in mind however, just as you are evaluating the supplier, they are also evaluating you the buyer! If you’re an Amazon private labeler, you are just as an unknown to them as they are an unknown to you. In other words they are taking a risk on you so naturally they want to try get as much as they can from you upfront to reduce their risks.
Over time as both parties get to know each other better, as a stronger relationship forms, as trust increases, and guanxi is built, then payment terms can evolve.
Guanxi – Building relationships to build business
Here is an example of a common payment terms scenario starting from the initial phase of ordering samples, to placing a trial order, to a repeat order, to building guanxi with the supplier to get more favorable payment terms.
Sample order: 1pc at $75. 100% payment in advance.
Trial order of 500pcs $2,500. 50% advance payment and 50% paid after inspection before shipment.
Volume orders: 1,000pcs at $4,500: 30% advance payment and 70% paid after inspection before shipment. Note price was negotiated down as well.
Over time as “Guan Xi” grows orders of 3,000 to 5,000pcs placed every 60-90 days: 100% due upon copy of B/L. This means that the buyer did not pay for the order until AFTER it was shipped.
A review of common payment term scenarios
The key takeaway here is that you will negotiate better payment terms over time as trust builds, volumes grow, and guanxi is obtained. If you tried to come in from day one and negotiate 100% payment upon copy of B/L the supplier probably won’t respond to you unless you’re email address says “@walmart.com.”
Speaking of which, the big box retailers are able to negotiate payment terms of net 60 and beyond because of the gigantic order volumes they can award the factory. So you probably won’t get the luxury of paying for a shipment up to 60 days (or more) after shipment because you’re not ordering tens of millions of dollars of product!
Case study 1:
Remember besides for a sample order, never pay for 100% upfront unless you’re willing to lose that money. One example is student of mine who before she came to me paid 100% upfront for a trial order. She placed the order blind without ordering any samples. When she asked me for advice, I asked have you seen the actual product yet? She replied that she only saw pictures on Alibaba and over email.
BEWARE: Often times in China “What you see is NOT what you get”. The pictures on Alibaba often times are often taken and copied from other sites or photoshopped to high-heaven. So I never trust the pictures from suppliers alone.
I recommended that she have the supplier send her samples of the products before production began to validate the sample quality. So she did and when the samples arrived she was in for a big surprise. It turned out that the products were NOTHING like what she was promised. The edges were cut crudely and unfinished. There was damage to the surface of the product. And the product was so flimsy that it couldn’t even do the job it claimed. Fortunately she conducted the transaction through Alibaba Secure Payment (Escrow) and is now in the process of getting her money back.
But imagine if she went ahead with the order. She would have lost thousands of dollars with an order full of junk not to mention the headaches of trying to fix it.
Case study 2:
A client of mine ordered a lot of fashion accessories from a supplier and they agreed on payment terms of 30% advance and 70% due after inspection. After placing the purchase order and monitoring production he noticed that there was a color discrepancy in the fabric. Because he hadn’t paid the 70% balance he had more leverage to get the supplier to agree to fix the problem. If on the other hand he paid 100% upfront, there’s no telling if the supplier would turn around and say: “Sorry mei ban fa”. This is one of the most common expressions in Chinese. Translation: “there’s nothing we can do”.
Lesson learned: For trial orders and above, if you pay 100% upfront not only have you tied up your cash too early, your increasing the risk of losing your cash and in case of any problems you have no leverage against the supplier to fix them.
How much you can negotiate for always comes down to your relationship or “guanxi” with the supplier. If the boss believes in you and sees you as a Grade A buyer, then you can get preferential treatment translated into better pricing, more favorable payment terms, more attention to your order, and prioritized deliveries.
Rule of thumb: If you’re new then don’t expect too much coming out the gate. 50/50 is fair starting out. 30/70 is good.
By properly negotiating payment terms you can free up more cash, reduce your risks, and increase your leverage with your suppliers as your business grows.
After reading this, if you were able to negotiate better payment terms to free up your cashflow and gain more leverage let me know! Good luck!
If you’re selling on Amazon or eBay you know that just competing on price is challenging. But I’d like to share some secrets I’ve learned managing multimillion dollar sourcing campaigns for my clients. One of the best ways to maximize your margins is to CUT YOUR SOURCING COSTS. In other words PURCHASING FOR LESS will give you more room to price your product competitively and win the buy box. So here are five ways to cut your sourcing costs.
Reduce your product costs
Negotiate payment terms to increase your cashflow
Reduce shipping costs
Quality control cost reduction
Consider going out of China for additional cost savings
1. Reducing your product costs
Reducing your product costs from your supplier is one of the most direct ways to save money. Here are some ways to negotiate lower product pricing with your suppliers.
As your order volumes grow so will your relationship with the supplier. So it’s natural that you can negotiate better pricing as volumes increase and trust grows. Suppliers like larger volumes especially if you share your purchasing plan with expected annual order volumes.
Here’s an example from a recent product I’ve sourced from China. In the first order, we purchased the product at $5.20 per piece from the supplier. We purchased about 500 units in the first order. In the second order, our volume increased to 1,000 units. So we renegotiated the pricing with the supplier and got the same product for only $4.70 per piece! This is a price discount of $0.50 per piece or approximately a 9% price cut. This will have a multiplied effect on your bottom line in reducing your import duties as well as reducing your Amazon and eBay seller fees if you choose to sell at a lower price but still maintain the same margins.
A second way to negotiate lower prices is to leverage other suppliers’ quotations. For example if Factory A is offering a product for $2.00 and Factory B is offering it for $1.90 you can use that as leverage against Factory A. But beware: in China you get what you pay for. If you cut the price too low, factories will cut corners on the product. So don’t go overboard with low price negotiations.
Another opportunity to negotiate lower prices is to take advantage of external economic factors such as currency depreciation. As the Chinese economy is slowing down, the government, which controls the RMB exchange rate, gets fearful that the slowdown will turn into a recession. Long story short, government policy will lower the foreign exchange rate of Chinese RMB against the US Dollar to make Chinese exports more competitive. In fact if you look at the foreign exchange rate in the past 6 months, the RMB has depreciated 4.5% from August 2015 to April 2016. This is a golden opportunity to renegotiate your price to take advantage of the 4.5% depreciation. Basically your dollars are worth 4.5% more against the RMB so you can ask for a 4.5% discount. The caveat is that your current quotations must have been made before the currency depreciation – in this case before August 2015. If so, then you definitely should renegotiate your pricing or you’re leaving money on the table. Note that the factory will not necessarily give you the full 4.5%. They will use other cost increases (labor, material costs, etc) as an excuse but I’ve gotten 2-3% price cuts by sending just one email.
Currency depreciation is a golden opportunity to negotiate a price cut
2. Negotiate payment terms to increase your cashflow
Nobody has unlimited money and as your business grows you will want to order more inventory to keep up with growing demand so you can scale your business. A common bottleneck is the amount of cash that you have tied up in your business – specifically in purchasing inventory from suppliers. One of the best ways to free up more cash is to negotiate more favorable PAYMENT TERMS as your order volumes grow and as you build a long term relationship with your supplier. Let’s look at this example.
In the beginning when placing a trial order payment terms normally are split between an “advance payment” or deposit when placing the order and a “balance payment” paid before shipping. When first starting typical payment terms are 50/50 or 30/70. But did you know that you can and SHOULD negotiate this as your business grows? Ultimately it is about TRUST and the more they trust you, the better terms you can get.
One of my previous clients had been doing business for many years with several Chinese auto parts suppliers. In the beginning the suppliers would only offer payment terms of 50% advance / 50% before shipment or 30%/70%. Later as the client’s order volumes grew to $20k to $30k per month so the trust. Eventually the suppliers agreed to payment terms of 100% after shipment.
Ultimately it is about TRUST and the more they trust you, the better terms you can get.
You can see in the chart below that typically buyers start off in scenario 1 (50/50) or scenario 2 (30/70). Better payment terms would be scenario 3 (essentially meaning that you don’t have to pay for the goods until the supplier finishes production and you inspect the shipment. This can free up your cash flow tremendously to invest it in other parts of your business (or paying yourself first as Rich dad says).
As a side note, the big players like Walmart can get payment terms of Net 30, Net 45, and Net 60 which essentially means they don’t have to pay for the goods until up to 60 days AFTER SHIPMENT. But they can do this because they purchase enormous volumes and have the buying power to negotiate these terms. I suggest you focus on getting to at least Scenario 2 or 3 as your business grows.
Payment Term Scenarios
3) How to reduce your shipping costs
There are many ways to lower your shipping and logistics costs. If you are shipping by air freight then you know that it’s not cheap. One way to save money is by using the supplier’s pre-negotiated air courier rates which are lower than what you can negotiate with the shippers. Suppliers typically ship substantial volumes so they can negotiate a lower rate with an air courier than you can as a single buyer. You can take advantage of their Fedex, DHL, or Air Express Couriers to get lower pricing. Many Amazon sellers have used Air Express Couriers with success. Their rates are cheaper than the major international shippers such as Fedex and DHL. Be sure to get a tracking number and some references to protect yourself.
As your volumes grow and if you are shipping larger bulky items, then sea freight is the best value. However be prepared for longer shipping times (typically 30-45 days depending on the destination) and more bureaucracy from import and customs procedures. In this case I recommend hiring a freight forwarder and customs broker to handle this work.
4) Quality Control Cost Reduction
If you ever had quality problems then you know that this can get very expensive and very frustrating fast. Several of my readers discovered quality problems with their product AFTER the product was delivered. In these cases the problems were not discovered until after arriving in the US. In most cases, it’s not economical to ship the product BACK TO CHINA. It will be very expensive and it will take a lot of time. Some were able to negotiate free replacements from the supplier however this still takes a lot of work (back and forth emails) as well as a significant amount of time for the replacements to be manufactured and shipped.
Quality control and product inspection can significantly reduce your sourcing costs and save a lot of time. I won’t bore you with jargon such as “Six-sigma total quality management systems” used by sourcing professionals but the 80/20 of it is this. Amazon and eBay sellers can takeaway these two points:
a) Monitor quality during the production process to catch problems early and fix them: You don’t have to physically be at the factory to monitor quality. One simple way to do this is to request photos of the production process to monitor any problems and catch them early. For example one of our products had a black buckle. We asked the supplier to send photos of the product during production and we saw that the supplier mistakenly used a silver buckle instead! Fortunately we caught this problem early and had them fixed it before bigger and more costly mistakes happened.
b) “Pre-shipment inspections”: I’m surprised that most Amazon and eBay sellers DON’T inspect their products before shipment. I always feel it’s better to inspect the product BEFORE they leave factory than after landing in the destination country. Obviously it’s much easier and faster for the supplier to fix the problem on-site then having to go back and forth over-seas. Second, if you’re stuck with defective products in the US, you’re not likely to send it back to China. It’s way too cost-prohibitive to ship by air and too time-consuming to ship by sea. I haven’t even mentioned the import duty costs and customs declarations bureaucracy that you have to go through either. Third, even if the suppliers agrees to replace them its going to take forever for them to arrive (production, shipping, customs) and think about the sales you have lost during this time.
If you’re thinking what if the supplier won’t fix the problem after inspection? Well if you’ve negotiated payment terms properly to pay the 70% or 100% balance after inspection (see above) then the supplier is motivated to fix them problem… or else you’re not going to pay! This is leverage.
3rd party inspection agencies are fairly common and cost roughly $310 per “man-day” of work as of now. Normally one day of work is enough to get the job done for small/medium sized shipments. I consider this a cost of doing business and an insurance policy against bigger problems down the line.
If this is cost-prohibitive, I recommend you ask the factory to make a “self-inspection report”. This includes photos of the product, instruction manual, packaging, measurements, and anything else important. It’s not ideal but better than flying blind.
5) Consider “going out” of China
China is not as cheap as before with rapidly increasing labor costs. Did you know that factory workers command up to a 15% raise every year?! In fact many factory owners tell me it’s a “struggle” to attract and keep good workers. Just like in the west, Chinese “millennials” are the “me-generation”. They are not willing to work as hard as their parents did for so little. At the same time, China’s macroeconomic policies are pushing China to be a more service-based economy. In other words the government doesn’t want China to be the world’s “cheap” factory forever. Take a look at how China’s monthly wages compare to other countries. China isn’t as cheap as you thought!
China is not cheap compared to labor costs in Thailand, Indonesia, and Philippines
What does this mean? Many large companies such as Nike, H&M, and Apple have already begun to shift their sourcing away from China to countries such as Vietnam, Thailand, and India to take advantage of lower costs. It’s important to note they are mostly sourcing simpler products lower on the “value chain” such as apparel, fashion accessories, footwear, and basic electronics.
Nowadays, large multinational corporations often implement a “China +1” strategy where they don’t put all their eggs in one basket. They may source certain products from China and others from suppliers in countries such as Vietnam. This diversifies their supply chain and reduces the risk of “putting all your eggs in one basket”. Smart importers do this as well to not only enjoy cost savings, but also reduce the disruption caused by Chinese New Year factory closures by shifting their sourcing to other countries during this period.
Where do you find these suppliers? For online searches, besides Alibaba, Global Sources has numerous listings of manufacturers from countries besides China.
Looking offline, trade shows are great way to meet legitimate suppliers not from China. You don’t even have to travel far as there are many regional trade shows in your home country that may target your product category. For example there are trade shows in Florida targeting pet products, the MAGIC and WWIN fashion trade shows in Las Vegas, and numerous others taking place locally.
Keep in mind that not all products can be found for a lower price outside of China. But it’s worth giving them a shot to reduce your sourcing costs as Chinese costs rise year on year.
Bonus 6) The 80/20 Rule: time savings = cost savings
Many Amazon sellers find that sourcing can be a time-consuming process. So besides cutting costs, saving time can be the biggest win for your business. You may have heard about the 80/20 rule or Pareto’s principle: “The Law of the Essential Few and the Trivial Many”. 80% of your results come from 20% of your work. 80% of your sales come from 20% of your products. The same rule can be applied to sourcing. If you would to get a free email script to negotiate the price cut, please signup for my free newsletter.
