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How do I confirm the legitimacy of a supplier?

Posted: 2013-01-10

Full Question

I would like to request your assistance to check on the following Chinese company to confirm if it is a serious manufacturer or a fake. I want to know this before I establish a L/C (Letter of Credit) and place an order.

Qingdao XXXXChemical Inc.
Address : XXXX
Kindly advise which sources I can use to confirm my supplier is legit.

Answer

In the China sourcing industry, when we talk about verifying a factory we are generally looking at two aspects:

1. Due Diligence: Is the company a legitimate business and not a scam or business on the verge of bankruptcy?

2. Quality Audit: Does the supplier have the ability to product the products I want to buy?

Type 1: Due Diligence is an investigation of a business prior to signing a contract to ensure the company (supplier) signing the contract is who they say they are. For example, do they really have 1000 employees, 50 million USD exports, own the factory 100%, have happy customers, good financial situation (will not close doors suddenly) and so on.

There are various levels of due diligence a buyer can conduct. Here are several options:

1) It doesn't cost any money for you to ask for references from the seller and contact those references.

2) There are websites which list bad suppliers.

3) For a few 100 USD, there are research firms who can work with the PRC government to check for any red flags.

4) For a few 1000 USD, investigators can go undercover to investigate the seller's business.

5) Conduct a search by supplier name on Global Sources (www.globalsources.com) to get additional information about the supplier like Credit Checks, Third Party Audits, Business License Checks, Supplier Capability Assessments and Credit Reports.

Type Two: Quality Audit/ Factory Audit

This service is designed to ensure the supplier has the equipment and experience to make a given product. Audits can be conducted by the buyer, but usually 3rd party experts are hired to do the audit, as it is a specialized skill. You wouldn't ask your sales team to do engineering for example.

In my opinion, doing both the due diligence and QC (quality check) audit is an essential step when sourcing from China. Perhaps I am jaded after living here in China for a long time, but I assume the worst unless proven otherwise. Trust BUT verify.

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