Evaluating suppliers

Whether sourcing from China or elsewhere, one of the most important things you as a buyer need to do is to make sure you are working with the right supplier. So where do you start?

Define your ideal supplier. China sourcing expert and PassageMaker Sourcing Solutions founder Mike Bellamy suggests buyers should first define their "ideal supplier." This is unique to each buyer and depends on a number of factors, including price, quality and lead time.

Define your location. Where factories are based should also play a role in supplier evaluation. While factories in China's northern and western provinces have lower manufacturing costs, the quality is often lower. Those located along the coast and in the southern region have higher production outlay but the quality is generally better. Note as well that the farther inland you go, the more expensive your logistics costs will be.

Look in the right places. Stuart Miller of AsiaInspection.com says leading B2B websites can help buyers find trusted suppliers. Many of them offer services to reduce transaction risk as well. But Miller highly recommends meeting suppliers face to face, such as in trade shows. Further, always do your due diligence and verify suppliers before working with them.

Do your homework. For David Dayton of Silk Road International, a China-based international procurement agency that specializes in helping buyers find the right suppliers and coordinate production, the best way is to visit the factory yourself.

  • You must visit the supplier yourself or pay someone to do it for you BEFORE you wire any money.
  • Buy information (online) and do background research on your suppliers BEFORE you wire any money.
  • Online sourcing websites all have a "premium service."
  • Confirm that suppliers can either produce the documentation you request or do not work with them.
    • Capacity and social compliance audits are worth the money-$600 and up.
    • All the large QC/testing companies can do professional testing for you.
  • A website, phone calls, faxes and emails are not substitutes for an on-site capacity audit (or project management or QC either).
  • Trade shows, while helpful, should not be your primary supplier evaluation tool.
    • Representatives may not be with the supplier after the show.
    • Products are cherry picked.
    • Decision makers are not usually at the show

Narrow down your choices: You should narrow down potential suppliers based on nonprice attributes before initiating contact. This is basically sending an email or fax, or making a phone call to ask for product-specific information, including price, minimum order and lead time. Below are some points that are often overlooked when requesting for quotations.

  • Tooling charges or mold set-up fees
  • Payment terms (30:70 vs. 100 percent vs. L/C)
  • Quality requirements
  • Bill of materials
  • Shipping/duties/taxes
  • Resist the tendency to quote DDP
  • VAT and VAT rebate
  • Are samples readily available?

How to identify a legitimate manufacturer

Assuming you prefer to deal directly with the factory and not a trading company, here are some tips to ensure you are transacting with a legitimate manufacturer.

  • Avoid factories that refuse to list the name or location of the production facility.
  • Focus on factories that can clearly show manufacturing experience with your particular product or production method. They should have samples and quality documents readily available if they are a real factory.
  • If you are able to arrange a factory visit:
    • Do your contact's business cards match the factory staff's information? If the cards do not match in name, color and address, then your contact is probably a middleman.
    • Do the people at the factory clearly know your contact or does he give out business cards to factory staff when giving you the tour of "his factory?" At worst case this may be his first time working with the factory and you may as well build your own relationship without him.
  • Look for clear information about operation size, equipment and staffing.
  • Be wary if the supplier offers a very large range of products.
  • Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.
  • Ask for ownership papers of the factory.
  • Be explicit that the production location may be audited by you in person and that this location cannot be changed without approval from buyer.

What to check when auditing a factory

  • Is the company in compliance with local labor laws? Does the factory comply with ISO 9001 and SA8000 standards?
    • Facilities: Areas for manufacturing, testing, packing and loading
    • Processes: Lead-time estimates, control of records and procurement system
    • Management: Credentials and workflow systems
    • Social compliance: Child labor, working hours and wages
  • Does the company have all the documentation that your lawyers are requesting or that you require?
    • Export license
    • Testing certificates
    • Industry standards
    • MNC certification (if applicable)
  • Visit the factory yourself.
    • Spend more time on the production floor than anywhere else.
    • Bring your own interpreter and visit as many sites as possible.
    • What is its current condition?
      • Capacity
      • Finances
      • Staff
    • Find out:
      • When the factory is most busy and whether this is in conflict with your schedule.
      • How much of their production is subcontracted.
      • How they control IP and nonconforming products.
  • Inspect workflow systems for efficiency and check whether they are actually practiced.
  • Test your supplier's understanding of your product's requirements. Request samples to be sent to you, to your exact specifications (pay if necessary).
  • Evaluate the factory's quality system
    • Does the factory have a clear list of all desired characteristics of a product before production starts?
    • Is it clearly specified how each characteristic should be measured?
    • Are approved samples available to workers in production and QC areas?
    • How does the factory evaluate and select material suppliers?
    • Does it communicate the requirements accurately to material suppliers?
    • Does it check whether a purchased product is up to specifications? How?
    • Does it send samples for lab tests? How often and for what tests?
    • Are materials properly stored?
    • Does the factory give clear procedures to each worker and for each job (including the QC staff)?
    • How does it validate that each production process achieves the desired results?
    • Does it carry out in-process QC? On what proportion of products? What do they do with the data collected this way (corrective/preventive actions)? What happens to pieces found to be defective?
    • How does it ensure that measuring instruments are available and correctly used?
    • Do the operators control their own work? Do they receive regular training?
    • Are materials delivered directly to subcontractors? How are they checked?
    • How does the factory control the work of the subcontractor(s)?
    • What does it check about the subcontractors' operations?
    • What proportion of products is checked? How are they checked? Does it include packing?
    • Is there one last inspection based on AQL statistics? Based on what level of AQL?
    • What happens when nonconformities are detected?

The following sourcing experts contributed to this article:
Mike Bellamy - chair of the China Sourcing Information Center's advisory panel and founder of PassageMaker
David Dayton - owner of Silk Road International, founding member of the China Sourcing Information Center and lead editor of CSIC's China Sourcer magazine
Stuart Miller - key account manager at AsiaInspection, in charge of managing the company's most strategic clients
Renaud Anjoran - founder of Sofeast Quality Control and writes advice for importers on the Quality Inspection blog

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