These days, it seems the same subject of conversation comes up whenever I meet with a sourcing agent: does their activity have a future?
It is a very wide question, and as such it invites a nuanced answer. Actually I don’t want to provide answers — just a few pointers.
Let’s start by decomposing the traditional processes managed by the sourcing agent.
1. Sourcing itself
“Sourcing” means identifying a supplier that is capable of, and interested in, manufacturing the product in question for a price that is workable for the buyer.
With the B2B directories like Global Sources, Alibaba, and others, one would think this process only takes a few clicks.
Unfortunately, the problem is not solved yet. These directories only facilitate the first step of the sourcing process (identifying potential suppliers, but not really screening or auditing them).
So the question is, will this problem be solved in 10 years? Are we in the same situation as internet users in 1997, before Google arrived and improved search results dramatically? Maybe.
In any case, it won’t impact sourcing agents that much, for the simple reason that they make their money after sourcing is done. Why is that? Because the buyer gives them a few percentage points, or a retainer fee, for following the production.
Which brings us to the next part…
2. Supply chain management processes
This is a pretty wide category. I had to break it down in several sections.
2.a Design sensitivity and engineering assistance
Let’s say the importer wants a factory to make a technically challenging product, but that factory is a little lost and the buyer doesn’t have the resource to guide them. That’s where a third party can really help.
Is this something the generalists (those agents who work on garments, furniture, electronics and so on) can deliver? Hardly. How can they have engineering capabilities that span multiple types of processes?
Shouldn’t they get specialized? And, if they want to remain generalists, shouldn’t they start setting up a network in hard-to-penetrate (for small buyers, that is) countries like Myanmar, Laos, and Cambodia?
2.b Daily Supplier Management
In 10 years, will there still be a need for someone on the ground to “solve problems” and save the buyer some time? Yes, probably. But less so than today, as Chinese suppliers get better at communicating and at understanding the importer’s side.
The question is, how will the successful agent work? With a phone and a laptop, without any roadmap? Or with strong processes in place to bring value to all parties?
And will buyers demand that agents learn how to be project managers? Surprisingly I haven’t heard of such demand from buyers.
2.c Quality Assurance
Many specialized agencies are happy to provide quality inspection services for fees that are much, much lower than most sourcing agents’. And they are more competent, at least when it comes to consumer goods.
So there will probably still be a need for specialized engineers in the QA business, for the more technical products.
2.d Forwarders
This is even clearer than the last section: I can’t see any need for an agent. More and more freight forwarders offer good service for very modest fees, even to small importers.
2.e Execution
Sourcing agents can make themselves indispensable by “making things happen”.
A very common way to achieve this is to put small orders in small factories that are unable to communicate directly with foreign customers or to manage export procedures. But the question is, how long will this be necessary to manufacture small batches in China?
Another way agents can bring value is by organizing production so that a batch is made in 2 weeks rather than 4 weeks. It demands a certain network and a deep understanding of all the variables at play — again, generalists are not in a good position.
2.f Marketing
What if the future of sourcing agents is to also become… marketing agents?
Some of them approach retailers with a whole concept including in-store displays and “credibility enhancers” (e.g. a famous chef’s name can be helpful to sell more cookware). This way, the agent makes good use of his understanding of the supply chain and cuts importers out of the loop.
What business model?
How will agents conduct their business in the future? A lot still act as traders these days. And some of them pretend to own factories.
Yesterday a friend told me the future would be shaped by what buyers are comfortable with. In Europe and in the US, buyers go and see the manufacturers that work for them — they seldom buy through an intermediary if volumes are above a certain amount. His bet is that China will get to the same situation, and that most trading companies would be extinct within 5 to 10 years.
I tend to agree with him, but there are notable exceptions (read the comment below this article, for example).
What do you think?
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PS: If you are in South China next week, you should consider attending this conference organized by the European Chamber of Commerce:
Profitable Sourcing – Strategies to survive in a more expensive China
Great article Renaud and I completely agree with all your points. China manufacturing in particular has matured to such an extent that the role of sourcing agents is very minimal, and of very little value. This trend will continue at a very fast pace. At the same time when one door closes others will open. The traditional “general” trading company model only works in countries where there are high barriers to entry. As you mentioned there is already Myanmar, Laos, Cambodia, and I foresee many more players. India is a big contender with a huge reservoir of young and cheap labour and the support of a massive domestic market. China has had a great run and now will move up the value chain – the big question is which country / countries will take over ?
Yes that’s a big question. But I wouldn’t discount China that fast. There is fast inflation in China, but also in India, Bangladesh, and so on.
Agreed – every country has its own set of troubles. China still has a few years dominating low end manufacturing but I would safely say that it is the beginning of an end to that era (which is not necessarily a bad thing).
Fully agree.
Another insightful article, Renaud. Would be interested to hear your perspective on how 3D printing might reduce demand for certain categories of product from China. Presumably this is going to affect not just China sourcing, but also sourcing from any of the potential ‘next up to the mark’ countries that everyone predicts will take over from China in producing low-cost products?
See previous article on that topic: http://www.qualityinspection.org/3d-printing-china/
I have no crystal ball, so it’s quite difficult to see where this is going! But it might do like the fax machine which was available for 20 years until it reached a “tipping point” around 1987 that killed many messenger businesses.
Seems like a good analogy! It will be very interesting to see how economies based on low-cost manufacturing respond to such a change, and how the sourcing industry changes along with them.
Absolutely. What is coming up is pretty uncertain but also exciting!
Hi Renaud, great article! And I am well concerned about what you wrote. I would be happy to share my opinion with you when you will come to HK. There is still good future for sourcing agent, even in China, but the keys of success are different than before. Our company started 10 years ago, and we continue to grow, and we also have seen customers switching to “buy direct” and then coming back to us few months later.
Thanks Pierre-Emmanuel.
Yes in your industry (furniture) buying direct is not as easy as, let’s say, buying bolts & screws.
The question is, why? Here are a few ideas that come to mind:
– Most factories are very poorly organized — except for the big ones, which are more expensive. (Buying from a small factory through a trader might be cheaper).
– Estimating the “acceptability” of final products is not very easy, so involving third-party QC firms can be frustrating. An agent with deep understanding of the product and the market’s requirements brings a lot of value.
You are right, but what is interesting in our case is to see huge companies with their own sourcing offices in China or HK that still come to see us and place orders to our company. But I am pretty sure in many other industry, there is still good future for smart sourcing agents.
I see. I guess sometimes it becomes a make vs. buy decision… “We can hire/keep people and make it internally, but why not just hand that job over to another company?”
I agree with you that the trading companies that stick around will be the ones that learn how to add value in a new way. Most Chinese factories are still far from proficient and effective working in English with foreigners, but that is changing rapidly.
Something we think about a lot is how the main problems exist because of the opaqueness in the supply base. Like you said, when you buy through a trading company, you don’t always know where your products are being made. However, more customers are requiring transparency on all fronts, and I think more visibility into factory level data will provide huge value to buyers if utilized in the right way.
Imagine confirming whether or not a factory actually worked on Sunday by looking at their electricity data rather than a social compliance audit. Imagine confirming that a supplier actually was operating consistently or growing their business based on water usage or other data rather than a credit report. The possibilities are endless. Would love to meet anyone else that has thought about or is interested in this data driven approach.
These are great ideas, if the supplier really can’t play a game…
I wouldn’t like to encourage suppliers to use their backup generator (extremely polluting) when working on Sundays, just to look good in front of customers or regulators 😉
Well, I do think there still be a future for sourcing agent.
The reason is simple. What they offer is service but not product. Think about why you employ someone to work for you even you knows everything about that business. The reason is to save your time and use your time to do other things.
Besides, some agents have his own network. This can make them get the best supplier in the shortest time. Even you can go to Alibaba or Madeinchina to select suppliers, it takes lots of time to get the right supplier.
And it’s not easy to communicate with factory. It’s not just language problem, you should have someone to monitor the manufacture process and do the quality control.