If you have never imported directly from China before, you are probably afraid of missing something important. What costs should you plan in your budget? What precautions should you take? You probably have no idea.
Most purchasers I have met have either learned from their colleagues (if their organization was already importing), or have gone through the school of hard knocks (making mistakes, hopefully only once).
There are few (if any?) good and practical books on China sourcing. There are a few blogs and websites, but not many purchasers read them. And, generally speaking, importers keep their buying strategy and their suppliers under silence–it is often a secret.
I was reminded of this recently, when I had to write off a significant amount of money because of a software programming project gone awry. In hindsight, after reading a few books about software development, I understand that I did a lot of mistakes.
There are actually a number of similarities between the best practices of China sourcing and those of software development:
- Define your expectations very clearly from the start. Don’t count on the supplier to do this–maybe he can help you articulate your vision, but you should be the one leading this effort. Yes it takes time, but it’s absolutely worth it.
- Start small with a supplier, keep transactions limited in scope–one block/order at a time.
- Retain the ability to hire an outsider who can inspect the supplier’s work (for software it’s easy with an SVN server, for sourcing it’s easy with a quality inspection company).
- Do not pay everything upfront. It is a terrible mistake. Instead, define milestones and the corresponding payments.
- Be careful with intellectual property. If you pay for something customized to your needs, you should own the IP (be it the molds, the original design files, etc.).
What I still can’t understand is why I didn’t think of all these issues. That’s what I keep telling my clients, but I can’t even think of it when it comes to another field.
Sometimes we just don’t follow our common sense… That’s the source of most mistakes, I guess.
Perhaps one of the hardest items to do when planning an import business like this is incorporating risks into the budget and financial plan. If you follow standard procedures for developing a financial pro-forma analysis, you’ll (hopefully) identify the various expenses involved. Renaud makes a number of good suggestions on things to consider. I would agree, for example, that including a third party inspection cost would be a good investment to add.
Many of these items, though, cannot easily be put into perspective for a general manager, when compared with the possible financial benefit. For example, we assume (note that risky word right there!) that we will charge our suppliers for warranty expense if there are problems with their goods. Now, we have generally been able to collect these from our supply base… but not always. In our trade (automotive parts), it is quite possible for the auto OEM to charge back many times the cost of the goods when a problem arises. Of course no one would take the deal if this expense had been in the business plan. We had even considered that yes, this could happen. But how does one balance out a possible cost (the warranty chargeback that a supplier may refuse to pay) against a planned benefit (the gross margin from the deal, assuming all went well?
The only principles I have been able to come up with are:
1) Don’t do this kind of business for a “one time” deal. It’s not worth the risks; any number of problems can arise which could not only suck all the profit out, but leave you in a large loss position.
2) Don’t do this business for low margins. High risks demand high margins to justify them.
Any other ideas???
Brad
Hi Brad, these are good points.
Most companies learn as they go, just like you did.
Another principle would be: assign a budget to develop the relationship with 2 or 3 key manufacturers: get to see them regularly, provide regular feedback, check their product quality, suggest improvements in their operations…
I could not agree with you more on all points – I have been an apparel importer for more than a decade – One huge beginner mistake is to make payments too soon in the process.
On another note i see you understand the software industry and have developed a web app for freelance inspectors. Where did you learn about the software industry – do you have any books or blogs you recomend? I am looking to learn about outsourcing some web 2.0 software for my apparel business. Thanks for your help!
Hi Tim, thanks for your comments. I am going to send you an email.