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80/20 Sourcing

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

What Trump’s win means for online sellers and importers sourcing from China… 45% tariff on Chinese imports anyone?

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In a huge upset, Donald Trump has won the 2016 US Election and will be the next president of the United States.  Putting politics and personality aside, what does this mean for US importers and online sellers who are sourcing their product from China?

If we examine an earlier interview with the NY Times, Trump said that he would support a 45% tax on Chinese imports.  Heads up, if this policy comes to pass when he takes office in January 2017, it will mean a huge big price increase if you’re importing product from China.  For example if your current product cost is $5.00 per widget, with a 45% tax this could mean that your cost would skyrocket to $7.25 per piece.  Now may be a good time to do a cost calculation to see if this you can stay in business under the Trump presidency!

The Donald wants to raise taxes on Chinese imports by 45%
Trump wants to raise taxes on Chinese imports by 45%

If this does comes to pass what can you do?  Here are a couple of options:

  1. Considering sourcing away from China
    Consider sourcing locally from the US.  The main idea of the tariff is to bring jobs back to the US.  Trump is suggesting that these jobs would come back to the US.  It sure sounds great to be able to order products from a company in the same country, eliminate the language and cultural barriers, get quicker delivery, all while creating new jobs, right? Not so fast.If we look the history at large companies like Walmart and their efforts at “on shoring” or bringing manufacturing back to the US, we can learn that those jobs didn’t come back for numerous reasons.  One of the main reasons is the trend towards automation. This isn’t the 1920s with workers crowding an assembly line.  Robots have taken over.  Many manufacturing jobs that in the past required humans on the production line and now have been replaced by robot technology.  Car manufacturers are a great example of this.  If you visit their factory floor, you will see that it’s virtually empty except for the whirr of robotic arms assembling components to make cars. Earlier this year, Foxconn, Apple’s contract manufacturer in China, cut 60,000 jobs in their factories by replacing them with robot technology.

    In an automated factory, the robots have taken over
    In an automated factory, the robots have won the jobs war

    Secondly, did you know that China is losing its jobs as well?  A common misconception is that China is still the cheap factory of the world it once was.  In fact labor costs in China rise upwards of 20% every year. According to a 2014 survey by the Economist Intelligence Unit, Shanghai is more expensive to live in than New York City.  Because China isn’t as cheap as before, it means that like China is its losing jobs to “cheaper countries”.  Where are those jobs going?  To countries with lower labor costs such as India, Bangladesh, Thailand, Vietnam, and Cambodia.  Some savvy Chinese companies have already invested and built factories in these countries to take advantage of their lower labor costs.

    Do you really believe that if Trump taxes Chinese products those jobs will come back?  I wouldn’t be so naive.  If we look at the trend of what major companies like Nike, The Gap, and Apple have already done, these jobs have been moving out of China to South and Southeast Asia for years.  So instead of sourcing from China you may end up sourcing from India or Vietnam instead.

  2. Negotiate better pricing from your supplier
    Depending on the purchase volume, your relationship or “guanxi” with your supplier (how much the boss likes you), as well as your current pricing you may be able to get your costs down a few percentage points.  But this will be a drop in the bucket compared to the big tax hike Trump is proposing.
  3. Raise your prices
    This is the natural result of the tax hike.  Your customers will not be happy.  But as they say, “when the tide rises all boats rise”.  Your competitors will face the same stiff tax increase so everyone’s pricing will rise as a result.

In summary, the landscape could be changing very quickly if these policy changes take effect in 2017.  What will you do if Trump’s 45% tariff on Chinese imports passes in 2017?

Went to the Canton Fair? How to follow up with suppliers AFTER the trade show so you don’t waste your trip

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It’s trade show season and some of you may have went to the Canton Fair or one of the trade shows in Hong Kong.  So you met up with potential suppliers for your product at the fair but now what?

Did you know that many online sellers go to trade shows and meet a supplier that they have a “good feeling” with.  But after the show… things don’t work out like they should.  For example one of my readers was sourcing a modified product and went to a trade show and met a supplier that he had a good feeling with.  After returning home, he sent them a box of products he wanted them to reverse engineer and source.  Afterwards he waited… and waited… and waited….  In fact he’s still waiting today.  Don’t let this happen to you!

How to attend a Trade Show like a Pro
Multimillion dollar online sellers are TWICE as likely to attend trade shows

TAKEAWAY: Going to the trade show is only the beginning (not the END) of the process.   Here’s how I follow up with suppliers AFTER the trade show and how the process is different for sourcing standard, modified, and custom products.

The audience paid hundreds of dollars to attend this event.  But I’d like to share it with you in this presentation I gave at the Global Sources Summit in Hong Kong.

Also in case you missed it I covered in Part 1: How to prepare BEFORE going to a trade show and in Part 2: How to attend a trade show like a pro.

 

Sourcing expert Gary Huang talking about How to follow up with suppliers after a trade show. Live from the Global Sources Summit for online & Amazon sellers in Hong Kong.

 

 

 

Heads up: 8-day National Holiday in China from Oct 1-8… Expect delays

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Update: This year’s holiday is even longer as the National Day holiday is being combined with the Mid-Autumn Festival holiday.  That means that factories, warehouses, and freight partners in China may be shut down up to eight (8) days from Oct 1-8.

Heads up – there is a weeklong holiday in China coming up from Oct 1st to 7th. The National Day or Golden Week holiday in China is the second longest holiday after Chinese New Year.  How does this affect you?

  • Factories may be closed a portion of or up to the entire week
  • Logistics providers such as freight forwarders, trucking companies, and the Port may be affected as well

TAKEAWAY: Often times suppliers will “forget” to tell you about holidays in advance.  So check with your suppliers and freight forwarders ahead of time to if production and shipments will get affected so you don’t miss the boat!

Shipping by sea? Your ocean freight costs may go up by 50% as 45 ships are stranded with over half a million containers as one of the largest shipping companies just filed for bankruptcy

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Breaking news!  Hanjin, one of the world’s largest shipping company’s has just filed for bankruptcy protection.  Apparently they ran into financial troubles.  But the key point is this.

45 of their ships are “stranded at sea”.  Ports are not willing to let their ships dock because of their financial uncertainty.  As a result over 500,000 containers are in limbo now.  

Hanjin containers at the Port of Long Beach
Hanjin containers at the Port of Long Beach

If you have an ocean shipment currently in transit, I recommend you check with your freight forwarder to make sure that it is not on one of these Hanjin vessels.  If so, better prepare for delays.

Even if this didn’t affect you directly, you may be impacted because freight costs are going up!  The cost of a 40 ft container from China to the US is expected to rise up to 50% in the near future with Hanjin’s vessels going offline while ocean freight traffic increases as we enter the busy retail holiday shopping season in Q4.  According to freight forwarder Flexport, “The price from China to West Coast ports rose from $1,100 per container to as much as $1,700 on Thursday, while the cost from China to the East Coast jumped from $1,700 to $2,400.”

If you were affected please contact me and let me know your situation.  Sharing is caring – please forward this to anyone that might benefit.

Payment Terms and how to negotiate them to increase cash flow, reduce your risk, and gain leverage if problems arise

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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
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
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
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!

BEWARE: a major economic event may delay your China shipments in September

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DELAYS are one of the biggest nightmares that we deal with in sourcing.  Any time your order is late, you not only lose time but also money and sales.

In China, there is a huge upcoming economic event that hasn’t gotten much coverage from the Western press that has potential to cause delays and disruption to your upcoming shipments.  This event is the 2016 G-20 Summit in Hangzhou from Sept 4-5.  As usual, China is not a very transparent place and they haven’t officially announced how the surrounding areas will be impacted in terms of factory closures, traffic control on the roads, and increased security at the ports.  But I’ve done research tapping into my network in the areas of manufacturing and supply chain.  So I’d like to share some findings with you so you can minimize the chances of delays to your shipments.

G-20 Summit
G-20 Summit to be held in Hangzhou in Sept.

What is the G-20?  

The G-20 is a major economic summit where many world leaders including Chinese President Xi Jinping, US President Obama, and many others will meet to discuss global economic growth.  They will meet in Hangzhou, which is located in Zhejiang province a few hours west of Shanghai.

To give you some background into what happens when China hosts a major event seen around the world, let’s look at the 2008 Olympics in Beijing.  This was a huge event for China since it was put under the global spotlight.  Some even called it a “coming out party” for China.  It’s a matter of culture as well since it’s a major “face” issue for China as the host to ensure that the event is a success.  So China pulled no punches in making sure that everything went smoothly.  As you may know Beijing’s big problem is it’s horrible air pollution – in fact it’s one of the most polluted cities in the world.

So what did China do to clean up the skies during the event?  Well first it shut down many of the heaviest polluting factories around the surroundings areas.  This reduced a lot of pollution and emissions.  Then they banned many cars from the roads.  This reduced emissions from tailpipes.   As a result attendees were treated to miraculously blue skies during the Olympic Games.  It was glorious!  However less than 24 hours after the event, as factories reopened and cars were let back on the roads, the skies turned smoggy gray again!  So expect similar measures as China prepares for the G-20 – factory closures to reduce pollution.

Another important factor is safety.  There are terrorist threats in China as is the case elsewhere in the world.  So security measures will be on high alert in the next few weeks.  This will impact transportation.  For example trucks delivering goods to factories and finished products to ports for shipment may encounter increased rates of inspection, which lead to delays.

Will all factories close down?  What industries will be impacted? 

No, based on my research only certain factories will be closed.  In fact the most impacted industries are fabric dyeing mills, printing factories, and chemical product suppliers and manufacturers. The common theme here is that they all deal with heavy polluting or potentially hazardous materials.  These pose both pollution risks as well as security risks.

Where are the impacted areas? 

The government has already ordered factory closures in the following cities in and around Hangzhou.  More areas may be affected going forward.

  • Hangzhou
  • Shaoxing
  • Jiaxing
  • Yuyao
  • Ningbo
G-20 Summit Impacted Areas: Hangzhou, Shaoxing, Jiaxing, Yuyao, Ningbo
G-20 Summit Impacted Areas: Hangzhou, Shaoxing, Jiaxing, Yuyao, Ningbo

Impact on logistics: roads and ports

During this period there will be tremendous traffic control.  Not only have many fabric dyeing mills and printing mills in the affected areas been ordered closed, these type of liquids and chemicals are currently being forbidden from being transported to factories in and around Hangzhou as well.  So this may cause additional delays.

Trucks near Hangzhou are reportedly required to have security licenses and will need to pass through additional security checks.  Based on past experiences, some chemicals and hazardous products may not be allowed to enter these areas until after this sensitive period. Relatively mundane sounding products like batteries may turn into contraband during the next month.

Moreover the Ports of Ningbo and Shanghai will be affected as goods passing through will be under close scrutiny.  So if you have orders shipping during this period, don’t be surprised if they get flagged for inspection leading to delays.

Take a look at this warning about the upcoming G-20 meetings from FedEx’s website.  Even they seem unsure of the impact of road closures!

Even Fedex is unsure of the impact of the G-20 on their deliveries
Even FedEx is unsure of the impact of the G-20 on their deliveries

Cost Increases

Because of dyeing factory closures and as production is consolidated into fewer factories, expect costs to rise.  The remaining factories have increased demand and limited supply so classic economic theory dictates that prices will rise.

Furthermore some dyeing work has been outsourced further out to Suzhou so this may affect delivery times as well as increase shipping costs.

How long will the impact last?

Though the actual meeting will only be held over a few days in early September, the actual footprint will be much larger.  We have learned that dyeing and printing factories suspected of being heavy polluters or dealing with potentially dangerous chemicals had been ordered to begin closing down from late July.  And this period has been apparently been extended through mid-September well after the conclusion of the G-20 meetings.

So what can you do?

Since China is not a transparent place and traditionally suppliers will not proactively share this type of information with you until it’s too late, it’s your responsibility to talk to your supplier and freight forwarders.

First, ask and find out the impact on your production and shipments (if any).  Also you may want to work around these dates to minimize your chances of being disrupted by the G-20 meetings.

Finally learn to anticipate these types of major events in the future so you can plan ahead.

Lesson learned!  Have any of your orders been delayed by the G-20 or other external factors?  Please reply or leave me a comment.

 

The impact of typhoons and summer heatwaves on sourcing from China

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While many of you have enjoyed a summer getaway to beat the heat and escape your daily grind, China manufacturing continues to churn away.  Factories continue to churn out orders so long as there is business to do and money to be made.

However recently some of you may have noticed slower response times from suppliers and even delays to your deliveries.  No it’s not the general malaise of summer but actually there are several important events happening that can affect your sourcing and deliveries.

The first two events have to do with the weather.  First in South China, a major typhoon just hit and it was the strongest storm in over 30 years according to Xinhua News.  Flights have been cancelled, schools closed, and factories shut down.  And flooding is expected for up to 3 days. In this case, many factories have closed due to safety precautions and production and service has been affected as a result.

Though it’s very likely that factories will be back online as soon as the typhoon passes, if you are expecting any important orders to be confirmed or deliveries to be made, beware delays!  Affected areas include Hong Kong, Shenzhen, Dongguan, and Guangzhou.

Preparing for the typhoon!

Moreover this storm is expected to move north and may affect coastal areas later this week.  Stay tuned!

The other event is the unusual summer heat that has hit the eastern coast of China.  Recently there were several days of sustained heat over 40 C (104F) coupled with high humidity.  This resulted in a heat index of over 55C or 131F!    Affected areas include Shanghai, Zhejiang and Jiangsu regions.  Some factories in these areas have taken days off because of the heat risks to workers.  So expect delays this week as well.

Takeaway: if your suppliers have been slow to respond this week, no, they’re not away on vacation but the weather could be the culprit!  But do communicate with them to monitor your production as well as to check if they are safe!

However there is a larger economic event looming on the horizon that can have a broader impact on suppliers in and around Hangzhou.  More to come about that soon.

Have you encountered any delays from your suppliers due to weather?  Let me know!

 

“Secrets of Successful Sourcing” Masterclass: How to find the right supplier from China

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I’m very thankful for the opportunity to host a webinar with Junglescout’s Greg Mercer and Gen Furukawa this week.  We covered four key areas of sourcing:

  • Chinese cultural and value differences and “Guan Xi”: It’s a relationship business
  • Supplier selection strategy – First cast a wide net then go deep sea fishing
  • Negotiations – You get what you pay for
  • Quality Control – The Never-ending story

Here’s the replay in case you missed it!

By the way, Junglescout is one of my favorite research tools for selling on Amazon.  I use it myself and highly recommend it!

We covered a lot so let me know what’s your #1 pain with sourcing?

Gary will be hosting a “Secrets of Successful Sourcing” webinar with Junglescout on June 13th at 4pm PST

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Exciting news – I’d like to invite you to a free LIVE webinar on the “Secrets of Successful Sourcing” which I’m hosting with Junglescout’s Greg Mercer and Greg Furukawa on Monday June 13th at 4pm PST.

This is the first time I’ve ever done this LIVE where I will walk you through the entire sourcing process from research to finding the right suppliers, asking the right questions, quick ways to spot and eliminate the bad apples, ordering samples, and what to do before placing an order.  Not only that but I will share a real case study with sourcing an actual product – and no, it’s not a garlic press!

You will takeaway several best practices I’ve learned in my years of sourcing in China as well learn from my mistakes to save time and make more money in your Amazon business.

We also will have a LIVE Q&A at the end where I’ll answer your questions.

For those of you who sign up, I’m offering a free bonus email script to instantly increase response rates from suppliers and get them to take you more seriously.

So signup now to guarantee your seat!

Look forward to seeing you there!

Gary
80/20 Sourcing

PS: What’s the #1 sourcing problem you’re dealing with right now?  Let me know now and I may cover it in the webinar.

5 Seller Secrets to Cut Your Sourcing Costs and Stay Ahead of your Competition

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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.

  1. Reduce your product costs
  2. Negotiate payment terms to increase your cashflow
  3. Reduce shipping costs
  4. Quality control cost reduction
  5. 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.

Screenshot 2016-04-22 10.06.43
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
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!

20150314_BBC042
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.