Sourcing new suppliers in Asia to outsource your product development and/or manufacturing to is a very common activity for many businesses. But for buyers who are new to sourcing from Asia, the process can be worrying.
Are you able to find a supplier that is suited to your needs and can deliver on their promises? Are they a scammer waiting to trap you? These, and more questions, may be on your minds.
So, with these concerns in mind, I’ve created a new video over on Sofeast’s YouTube channel that new buyers in particular will find helpful because it outlines 4 of the key risks you face when sourcing new manufacturers in Asia (and elsewhere, too). I also share my tips on how to reduce or avoid these risks as well.
4 risks you face when sourcing new suppliers
These are 4 of the key risks that trip up buyers and some advice to help you do effective due diligence when sourcing new suppliers.
1. The ‘supplier’ is actually a scammer
Scammers may have quite a sophisticated online presence, with a good website, Alibaba profile, real company name, etc, to fool inexperienced buyers into trusting them. Instead of being a factory’s salesperson, it may be someone setting up such a website alone in an apartment somewhere.
They promise you everything and offer low prices, but their ultimate goal is to get you to wire a deposit for goods and they will then disappear without delivering anything. In return for low prices, they may even push you to send a larger deposit than normal, say, 70 or 100% instead of 30% which is more typical.
2. The supplier is a trading company pretending to be a manufacturer
Trading companies buy products from a manufacturer and sell them to you, occupying the role of a middleman. In some cases, working with a trader can be useful, especially if they’re upfront about who they are, they specialize in your product type and have a mature supply chain of their own that they’re willing to disclose, and you lack experience in sourcing the products that they’re well accustomed to.
The problems for buyers start when a trading company passes itself off as a manufacturer, so you think you’re dealing with a factory directly (more common in China than in other areas). In this case, you might run into many unexpected issues. This is because, in a typical situation, they actually don’t have control over the factory they’re buying from, as it’s a separate business. They’ve merely passed along your order, but as an occasional customer, the factory doesn’t treat their order (of your products) as a priority.
They’re also unlikely to do the same due diligence as a Western buyer and have a manufacturing agreement, therefore there’s really very little they can do if the products made aren’t up to your standards or maybe aren’t even safe or compliant with your market’s regulations. In order not to lose your order, they may keep any problems from you until the order is being shipped.
Checking the legal records of the company will unveil the business type, amount of capital investment, how long they’ve been operating, their official location (country and city), etc. If these do not match up with what you have been told, it’s a red flag and you should question the supplier about the discrepancies until you’re satisfied it’s safe to work with them.
Regarding the risk of them really being a trading company, the amount invested into the business as well as the authorized scope of business will, in most cases, show if they are a real manufacturer or a trading company.
3. The supplier has no quality system
Even if you have found a manufacturer who you can deal with directly if they don’t have a good quality system you’re still at risk, because they may not be able to provide products that are up to specification. If they are not in the habit of checking the products that they’re manufacturing throughout production, how can you be sure that you will receive quality products?
Just some examples of appropriate quality activities are ensuring there is a clear and documented standard, doing incoming QC on parts and materials, implementing testing stations and jigs on the lines, and checking quality in a structured manner after batches are made.
Performing an on-site factory audit provides you with a snapshot of the supplier’s actual capabilities, so you can see if it matches the promises they have made to you. An auditor will report on the number of staff, products they are experienced in producing, their capacity, the production lines and what they have on them, and their quality and safety systems, to name but a few checkpoints.
For smaller factories, an Initial Factory Evaluation (IFE) will usually be adequate. If your supplier’s factory is larger or if you have more advanced requirements, a more thorough Quality System Audit (QSA) will be better suited as the auditor goes into even more detail.
4. The supplier provides you with a bank account to pay into that is unfamiliar or seems strange
A common trap that fools buyers is when they’re provided with a bank account by scammers which appears to come from their supplier’s company because they’ve infiltrated it and sent fake emails to you. This then results in sending a payment to scammers which is stolen.
On the other hand, sometimes you’ll be given an unfamiliar bank account in, say, Hong Kong, to pay into, even though the company is in China. This might be because the supplier is trying to get you to send it to a personal bank account or because you’re working with a trading company that is actually not connected to the manufacturer you thought you were working with.
It’s also possible to check bank account information provided by a would-be supplier and to verify which company it is truly for. This will reduce the risks of you sending a payment to scammers by accident, making a payment into an unscrupulous manager’s personal account, or even to a business you’re not expecting to. If the details are found to be different or incorrect, this is a red flag that you need to take up with the supplier before you send any payments.
P.S. When sourcing new suppliers you should also be wary of fake certificates
Sometimes a supplier will provide certificates that, usually, would give you faith that they’re able to produce safe and compliant products. For example, a CE certificate and the associated test results would indicate that they can produce products that will be compliant for sale in Europe. Unfortunately, there are sometimes cases where suppliers show their customers a fake certificate, or (more often) a certificate that is not related at all to the product being discussed, in order to win the business. This, understandably, puts the importer at risk of putting unsafe or non-compliant products on the market… leaving them liable to penalties from market surveillance authorities or even lawsuits if consumers are injured, not the manufacturer.
In the same way that checking legal documents is possible for businesses in China, Vietnam, India, or wherever else you’re sourcing suppliers from, it’s also possible to verify the authenticity of certificates and reports to protect against being scammed.