Procurement and Buying Agents in China: A Complete Guide

by Fredrik Grönkvist

The Procurement Agent is a freelancer, or part of a larger organization, arranging various aspects of the trade between China and buyers around the world.

There is no set standard for what exactly a Procurement Agent shall do. For the sake of clarification, I list a few examples below:

· Supplier Identification & Price Research

· Sample & Prototype Development

· Quality Assurance & Quality Inspections

· Social Compliance Audits

· Product Compliance Consulting & Product Testing

· Shipping & Logistics

· Customs Procedures & VAT

When your import from china business grows, you need to find a buying agent to help you, but it is not easy. You do not know how and where to find an agent. There are questions such as should you sign a contract with them? If yes, what clauses to put on the contract? How can you tell if they are trustworthy? Should you use a buying agent or a buying office?

Here are 6 things you should keep in mind when selecting an agent:

1. Trust is everything

I think you would agree with me that to work with an agent or broker, trust is important. I would rather use a reliable and trustworthy but mediocre agent than someone who is capable but not reliable. Ideally, you need someone who is competent and reliable.

How can you tell if your agent or representative in China is trustworthy? In many cases, first impressions can misguide you. You can do some online research to see if there are any comments and feedback about them. Give them some trial tasks to gauge their performance. You can generally understand their work ethic by working with them a few times.

2. Contract versus verbal commitment

Some buyers think a contract is not important so they work with purchasing agents and suppliers on verbal commitment, binding by morality and virtue.

We have a caskets buyer in the US, for whom we act as a buying office. This client does not pay attention to their contracts. Unfortunately, their supplier delivered low-quality products, and when their products failed to pass three quality inspections, the supplier refused the fourth inspection.

When we asked our lawyer to help, he asked to see the quality standard we had agreed to in the contract, which we did not have. The lawsuit is still ongoing. Without a properly written contract, an easy lawsuit becomes complicated.

My suggestion is to sign a detailed contract with your buying agent irrespective of how good your personal relationship is with the agent. Ask the help of lawyer to draft and review the contract.

You could also read our 3-part series on how to negotiate a contract with Chinese companies.

3. Buying offices versus buying agents

Buying offices normally have experience in more industries while buying agents often specialize in certain areas such as apparel and electronics. If your sourcing projects cover many industries, it might be better to use sourcing offices. If you deal with one product, you could work with individual agents.

Also, if your project is relatively big, it might be better to use a sourcing office as you will need many sourcing experts to work on your project at the same time.

Buying offices are normally legally incorporated companies, so if they breach the contract, you will have somewhere and someone to chase after.

A sourcing agent is often a one-man show. If bad things happen, they might disappear. So relatively speaking, buying offices are more reliable than agents.

Agents might offer low rates compared with buying offices. For small buyers, a reliable agent might be a better choice.

4. Hidden commission

It is a public secret that many sourcing agents get a commission from suppliers. But this means your buying agent and supplier become allies. The agent will not push for the best price for fear that the supplier will not happily give them a commission. They might turn a blind eye to quality issues. They might not recommend the best supplier to you, favoring instead a supplier that gives them the best benefit.

You pay your agent a decent service fee but they present to you a made-up sourcing report -- the price is not real, the factory presentation is biased and the best supplier is disregarded. All these problems are caused by hidden commissions.

These commissions are so common that suppliers often offer to give them to agents without them asking.

So how can you make sure your sourcing agent will not betray you by taking a hidden commission?

First of all, you should sign a contract with your sourcing agent clearly stating that active or passive hidden commissions are not allowed.

Second, contact other suppliers randomly and see if you get a lower price for your product.

5. Hire an expert, not a secretary

There are thousands of products global buyers are buying from China, and each product is different. Sometimes it takes months or even years to understand the production mechanism of a specific product. A competent sourcing agent should be a product expert. If he does not know the product, he will not know how to plan quality control, he will not know the cost, and he cannot negotiate the price properly. He might not even know where to buy products.

That is why Li & Fung hires only sourcing experts with more than 10 years of working experience in certain industries. The experience gives them knowledge of quality control, price negotiation, product research, and development. They can deliver a solution.

6. Communication is often a problem

First is the language. You should make sure your sourcing agent speaks your language well enough to understand your emails, and to draft and review an English contract. They should also be familiar with the product in your language (parameters, specifications, parts, and components, etc).

You need a sourcing agent who is well-prepared to hit the ground running. If you are looking to build a long-term relationship with your agent, ideally the agent should be proficient in speaking, as in many cases, email is slow and you will need to call them to speed up the process.

But as a matter of fact, generally Chinese people do not speak English well, so for important matters, it is better to send an email or fax to make sure your agent understands you, and will not miss your key points after the phone call.

The efficiency of communication is an issue to look at, especially when there is a time zone difference. Your agent should reply to your emails promptly. Instant messengers can be used to speed up communication while text messaging can also be used for urgent contact.

This industry, which has grown very big in Asia in the last few decades, includes everything from rogue agents to major trading houses. The purpose of this article is to explain what a Procurement Agent can be expected to do for your business, and how they differ.

Evaluating a Procurement and Purchasing Agency in China

a. Product Expertise

Knowledge about a product and industry is a decisive factor. First, and an insider has a much more comprehensive product expertise, which is required to understand what makes good quality (and price) for a certain product. Second, this may also speed up supplier sourcing and vetting procedures, as they can utilize an existing network of suppliers.

However, don’t expect to find an existing Procurement and Purchasing Agency for every single niche product out there. And, even when you do, it’s up to you to communicate your quality requirements and product specs – to properly educate your agency.

b. Offered Services

There is no set standard for what exactly a China-based Procurement and Purchasing Agency should offer. Some offer more of a ‘one stop shop’ solution while others are strictly specialized, only performing specific functions. We will get back to the latter later, but first, let’s dig deeper into what various Procurement and Purchasing Agencies actually offer:

c. Procedures

Finding a supplier isn’t hard. You can just go on Globalsources.com and you’ll have millions of options right in front of you. However, identifying industry-leading, and in relative terms, reliable, suppliers is a whole different thing. Let’s make a broad comparison between different types of Procurement Agencies:

d. Revenue Model

There’s more than one way for a Procurement and Purchasing Agency to make money. While many importers assume that all agencies make their way by charging commissions based on the order value, that is not the case. Below follows an overview:

Some Procurement agents combine two or more revenue models. For example, they may charge a commission based on the order value, while charging you for additional services, such as Quality Inspections and Supplier Sourcing. Many also receive kickbacks from the suppliers, as an alternative side income. This may, however, come down to individual employees of the agency, rather than kickbacks as a company policy.

Summary

I don’t recommend attempting to find a ‘one stop shop’ managing all procedures involved in buying from China. This is regardless of your industry. You must works ‘hands on’ with the supply chain, and ultimately maintain control. The alternative, to let a consultancy set up a functional supply chain, is simply too expensive for most SME’s. This is how I would do it: