Direct Sourcing in China: What Functions Do Importers Need to Perform?

Direct sourcing has been the dominant trend over the last 20 years. Importers have reduced FOB prices by going “factory direct” by eliminating trading companies. But, in some cases, it has often resulted in higher overall costs and lower reliability.

The good news is, importers can work much more professionally if they manage the whole process themselves. The bad news is, it takes serious work.

Fifteen years ago, most importers were working with trading companies (either intermediaries based in Hong Kong, or “import & export” firms on the mainland). This setup had a cost (the trader’s margin, at that time, was seldom below 20%), but purchasers were giving their business to professionals who were carrying certain functions (quality control, problem solving…).

As “cutting the middleman” became a common mantra, buyers sometimes forgot that they need local support. Let’s look at the main functions traditionally managed by trading companies:

• Match making: either via a trusted network (for insiders only), or through a more scientific approval process comprising of supplier pre-qualification, background checks and factory audits.
• Management of new product developments: many foreign buyers don’t know how to communicate clearly with Chinese manufacturers. Exchanging messages through a young translator, sending and resending samples, is frustrating and time consuming. Some trading companies and agents are very good at making this process more efficient.
• Completing product specs: most importers don’t bother to define their all their expectations. Someone has to decide what packaging materials to source in 90% of cases. Relying on the factory is very risky, and a better solution is to pay a QC firm to define it clearly once and for all.
• Quality control: by third-party inspection agencies or in-house staff. The use of statistical tools that are also used by retailers in the importing country reduces the risks of rejection of a batch that was accepted back in China.
• Reducing payment risks: buyers need to use tools such as letters of credit or OEM agreements, especially when a relationship is starting and there is no trust.
• Getting out of trouble: this is probably the most under-rated function of a good intermediary. When problems arise—and they will—an importer cannot just solve them by emails and phone calls.

Have I forgotten something?