When an importer wants to source a new product in China, he basically has 4 options, 3 of which involve the use of a sourcing company:
Of course, you can find a supplier on a trade show or in an online directory (e.g. Global Sources), ensure they are serious via a background check and a technical audit, and start purchasing directly.
If you have the right organization to support this model and if you find suppliers easily, you don’t need a sourcing agent.
In other cases, you need to make a choice between three types of sourcing agents:
The commissioned agent
If you find someone that you can trust, and who already has deep experience in the product line you are looking for, this can be a good option. You pay this agent a fixed proportion (usually between 5% and 10%) of the FOB price for the orders that he follows.
The problem is, importers are seldom good at judging whether someone is trustworthy. I bet 95% of commissioned agents get money from the factory without telling the buyer. When things go wrong, many of them actually defend the factories in front of their clients! This is why I generally don’t advise to use this type of agent.
I classified it as “high involvement” because the purchaser needs to follow what happens closely. These agents are seldom professional enough to really manage production and to ensure good outcomes. Once the orders reach a certain size, it is much better to manage everything with your own team.
- Sourcing agents in china: the good and the ugly
- Hidden commissions between China factories and sourcing agents
The trading company
If you purchase low quantities and if you don’t want to handle all the details of China production, you probably need to work with a trading company. They can find small factories (often unable of dealing directly with export customers) that are interested in your small orders.
The trader adds its margin on top of the manufacturer’s price. That’s why many professional purchasers want to “go direct”. This is not rational because, if you negotiate prices, a trader might still be cheaper than a larger factory (which tends to be more expensive than small workshops, in China anyway).
What bothers some importers is that the supply chain remains hidden. This is a valid concern. Even if you purchase from a trader, you should inspect the product quality — except if the trader pays for a famous third-party QC firm to do it, and shows you the reports.
- Advantages of buying from a trader in China
- Chinese trading companies and their dirty little secrets
The third party service provider
As the saying goes, you can eliminate the middleman, but you’ll have to take over the functions he performs… Or subcontract them to a third party!
If you place large orders, many manufacturers will take the time to respond to a third-party service company’s inquiries. And the service fees will likely be low, compared to the total order size. This is why this option is best suited for large orders.
If you can justify the upfront investment, this is a great way to source new products. You’ll benefit from a professional identification & screening process, and you will have full information over your supply chain.
Some of these companies sell their services as “project management”, “procurement”, or “supply chain management”. They often adapt their pricing structure to each customer. Some of them act as a trader and take possession of the goods. Not all of them are 100% transparent about every sub-supplier. I admit this is a wide category…
What do you think?
>> Related eBook: Understanding How to Reduce Quality Issues & Costs in a Factory