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Supplier verification: How to minimize online sourcing risk

Posted: February 23, 2011

Experts stress the importance of due diligence following Alibaba's disclosure of supplier fraud.

Sourcing experts are strongly emphasizing the need for even the most experienced buyers to ensure effective evaluation measures when selecting suppliers in China—particularly when sourcing online.

This follows the abrupt departure of Alibaba's top two executives after their disclosure that the company's sales staff "intentionally or negligently" allowed fraudsters to set up more than 2,300 verified storefronts.

"With the information coming out about the resignation of the CEO and COO of Alibaba, the online sourcing world should have just become a little better informed," said David Dayton of Silk Road International, a China-based international procurement agency that specializes in helping buyers find the right suppliers and coordinate production.

"Let's face it, we are all still going to be looking online for new suppliers. So what can you do to protect yourself if you cannot fly to China to investigate every potential supplier that you come in contact with?"

According to Dayton, the bare-bones online sourcing experience should look something like this:

  • Search only for suppliers that have been verified by a third party outside of the website that hosts their information.
  • Pay for background information and document confirmation for any potential supplier before you make any commitments or pay a deposit.
  • Include in contracts with your supplier mandatory 3PQC visits during production and before the balance of payment is made at the completion of the project.
  • Have a third-party testing company test your products to confirm quality and components.
  • Confirm and verify container loading information to see that what you have ordered, tested and checked is indeed what you are being shipped.

He points out that while all of this might sound like a lot of time and money to be spending on relatively seamless online ordering, it is less than the cost of losing a 30 percent deposit, and takes less time than finding a completely new supplier and starting all over again.

So how do you know if you should really be paying for these additional services? Here is Dayton's list of clues to help gauge a supplier's level of risk:

The supplier:

  • Will not provide copies of licenses or documentation on request.
  • Does not want you to visit its factory.
  • Asks for cash and provides no guarantee, e.g. cash transfer via Western Union
  • Is not easily or consistently available to talk with or meet outside of the online forum.
  • Will not or cannot provide you with references or past client referrals.
  • Provides an oddly large range of either products or services.
  • Will not allow third-party QC.

"If your chosen supplier is not satisfactorily providing this information, search for alternatives or at least get reputable third parties involved in the process to help protect your investment," Dayton said.

"You can also pay for a background check for a supplier or individual, verifying tax history, legal history, corporate registration, ownership and board members."

Read David Dayton's full article

According to another industry insider, Sofeast Quality Control founder Renaud Anjoran, buyers should pay for background checks on their list of prospects, after which samples can be requested and compared. This is advisable particularly if buyers plan to procure directly from the manufacturer.

Factory visits or audits continue to be critical in the supplier verification process. Buyers can opt to go to the plant themselves or engage a third party to conduct supplier audits, which could include an assessment of manufacturing and QC processes and confirmation of compliance with various industry, safety and environmental standards.

Inspection companies within China that provide specialized commercial inspections, factory assessments, social audits and laboratory services include Sercura and Specialized Technology Resources (STR).

"Any buyer who has done research online and later visited Chinese factories in person will tell you that the websites, catalogs and trade show booths of the majority of suppliers exaggerate to some extent the supplier's true capabilities," said China sourcing expert Mike Bellamy, who serves as the Chair of the China Sourcing Information Center's advisory panel and is the founder of PassageMaker Sourcing Solutions.

"Unlike the medical and legal professions, companies and individuals who provide sourcing services or run a factory are almost totally unregulated in terms of truth in advertising, codes of conduct and service standards. There is no board of examiners to self-regulate the manufacturing industry. Combine this with the tight margins that most suppliers operate under, and it is no surprise that many vendors take liberties with the truth in order to capture the order.

"Exaggerating the truth in terms of factory capabilities is one thing, but claiming to be a factory and disappearing with the buyer's money is a whole different level of fraud. But that fraud has been happening for years in China—nothing new.

"What makes the situation at Alibaba so shocking is that Alibaba markets itself as a safe place for buyers to find suppliers and provides a host of services to put them in touch with each other. But now we learn Alibaba staff cooperated with the thieves to scam the buyers."

Bellamy noted that most of the scams happened to buyers who purchased $1,200 or less of high-demand electronics at low prices

"This makes total sense for a number of reasons. Small buyers generally do not have the experience to know when they are getting scammed and fail to do their due diligence in advance.

"Unfortunately, because they may be on a tight budget, many small buyers do not utilize third-party QC to check the quality of the goods before final payment is made."

"In summary, pray for the best but plan for the worst. Do your due diligence when selecting a supplier and tie payments to delivery."

Read Mike Bellamy's full article

Message from Global Sources CEO Merle A. Hinrichs

For more sourcing tips and expert advice: Smart China Sourcing

Global Sources supplier verification
Global Sources verifies and validates suppliers through personal visits as well as independent third party checks on business registration, credit status and supplier capability. We also include a star ranking system to reflect the extent of verification we provide about our suppliers. To further safeguard buyers and minimize fraudulent activity, we have a clear separation of the sales team and supplier review processes. We use reputable third party services to confirm and validate each supplier, and provide clear policies to address complaints received about suppliers.

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