Monday, May 29, 2018
Private label manufacturing has never been so accessible. Yet, challenges remain dictated by complex inventory management, overseas relationships, and quality control. A good supply-chain has a lot of moving parts. If you want to reduce your exposure, make things more efficient, and start aggressively growing your sales, read on for our 7 Tips and Tricks to Supply-Chain Success. Written by China and ecommerce experts. (Note: The terms vendor and supplier are used synonymously.)
1) Vendor Referrals Are Your Best Friend.
Arguably, one of the most important parts to a successful product is a good manufacturing partner. When sourcing suppliers for your new products, where better to start than your current partners. Think about it: your suppliers want to see you succeed. That means more business for them. You’ve invested time, effort, and money into each other. That makes them the perfect source of recommendations and advice.
As they say, referrals and networking are key to growing your connection pool. High-quality suppliers in China are a closely-knit with one another. They’ll vouch for you, get you connected with local vendors that may not be publicly listed, and generally will only refer you to other suppliers that they can vouch for (after all, it’s their name on the recommendation and they don’t want to lose you).
There are exceptions, however. You don’t want to ask your suppliers for recommendations of competitors, products in the same vertical, or complimentary products (like packaging). If you do, they will likely get offended or offer to do it for you (as a trading company). Not the best thing for your relationship. Stick to recommendations in opposite product verticals. Transparency and control are the two most important factors in a successful, scalable supply-chain.
2) Define Your Terms and Specifications in Advance.
From day one, set the terms of agreement right away and make sure they are thorough. Don’t leave any wiggle room. Product specifications, quality requirements, etc. all need to be set in stone and clearly outlined in order to prevent any misinterpretation. It may be worth having these double-checked, translated if possible, then triple checked in order to make sure there are no discrepancies later in the game. Once you have these completed in a clear, written format, have the supplier agree on it. Ensure these terms are outlined in both English (and Chinese if possible) on the invoice to prevent misunderstandings once the order is placed. It can be helpful to have your supplier warranty certain defects with the product, more often than not they will agree, and you can rest assured when your product rolls off the production line. We've had seen clients whose suppliers have re-made entire orders high-value orders post-production because they mixed up the color, because it was clearly written and defined.
3) Contracts Don’t Work and Aren’t Enforceable.
Now we understand this might sound contradictory of the above point, in fact it’s complimentary. Your NDAs and other production contracts are not enforceable against your Chinese manufacturer and you may find yourself s*** out of luck if you were depending on them. You might feel you come across more professional and serious if you have a prepared NDA and manufacturing contract, but in actuality you might come across the opposite. Most sales agents are allowed to sign whatever they want, with no review or repercussions because they know it’s not enforceable.
Enforceable contracts must be written in both English and Chinese and must be signed by both parties and chopped* by your vendor in wet ink by the legal representative. The jurisdiction in case of dispute must be clearly defined along with a series of other standard clauses. The original copy must then be mailed to you and stored securely. Not to mention, good enforceable contracts will run you in the high 4-figures to low 5-figures to write up.
Contractual Violations? Fighting a lawsuit in China can cost a minimum of tens of thousands to fight out even the smallest of violations with even the best contracts. After spending whatever reserves you had on fighting the lawsuit, they will probably side with the local vendor over you in the end. More often than not, it’s a lose-lose situation. As mentioned above, set your terms clearly and your supplier will conform to your requirements and you won’t have to bother with added contracts. Most problems with your supplier are not deliberate or scams–98% of the time it’s quite simply a misunderstanding that can be rooted back to the initial terms of agreement.
*In the US, authorized representatives of a company have the ability to sign a contract on the company’s behalf. You negotiate a deal, sign and begin the cooperation. However, in China it’s a little more complicated than that. Signing a contract is not the final step in China. For Chinese businesspeople a completed contract is simply the proof that both sides have developed a trusting relationship. In China, the company chop is the main means of legally authorizing documentation. The chop is a red stamp or seal - obligated for every company registered in China to have and must to be registered with the Public Security Bureau (PSB). The chop plays a powerful role in Chinese business/documentation. Additionally, it’s important to have the contract signed and chopped in wet ink, and then store the original copy.
4) Factory Audits: The Hidden Gems of Supply-Chain
We can’t stress enough that management is key to vendors – and this will vary dramatically from vendor to vendor dependent on size. Small vendors where everything is micro-managed by the big boss are often efficient, low-cost, and more often than not decent quality. Large vendors have stringent management plans, quality control, and other processes—meaning that everything is checked, double-checked, and documented for their protection and for yours too. We see the most issues and delays in small to mid-size vendors where capacity and work-load is stressed and is no longer micro-manageable and/or a good management structure is not in place to cope with growth. This is extremely hard to catch unless a good factory audit is conducted.
Ensuring that a thorough audit is conducted will require hiring a highly educated, well vetted auditor for the job. A good factory audit can also check business dealings and ensure the vendor is business worthy ensuring they make, keep, and execute on their commitments. It’s important to keep tabs on your suppliers. They might be small for your first order and growing rapidly a few months later facing constraints. The magic timeframe for factory audits is once a year for most suppliers, and sometimes up to twice a year for smaller, riskier suppliers or rapidly growing suppliers.
Factory audits are not just for big companies with a large manufacturing base (although equally important). If you have all or a large part of your eggs in a few suppliers, a factory audit might be more important to you than a larger company with 7 suppliers making the same product. You don't want your only baskets to have holes at the bottom. You may find it equal or more important to conduct regular audits the smaller your supplier base is.
Don’t listen to what anyone tells you, quality control is an on-going, endless process. It is up to you to inform your vendor when you find any issues and tell them where to improve for the next order. As far as they’re concerned, the quality of goods they’ve given you are perfect and they’ll continue at this level. In fact, if you tell them nothing, they may even get too comfortable.
Cost of fixing quality problems over the production cycle
5) Quality Control Is Endless
Vetting your supplier’s quality control starts at sourcing. You want to find suppliers with strong, high quality samples. From there, if an audit is conducted, you want to specifically check their internal quality control system for your product line. As the chart shows above, the earlier in the process problems are found, the less it costs to fix. If you are not entirely confident in your vendor’s ability to follow specifications or maintain quality, it’s worthwhile to conduct a product inspection at the 20% mark in production. This can help ensure that the products being rolled off the production line are of satisfactory quality, and if not, production can be halted until further instruction. Factories are significantly more cooperative in fixing issues at this stage versus when the goods are nearly complete.
After production finishes, we recommend always getting a pre-shipment inspection to make sure the goods are proper, packaged correctly, and the cartons are strong and appropriately labeled (in the case of Amazon). Process is important and suppliers respect that. Often, we’ve seen suppliers get too comfortable after the second or third order, and that’s when corners are cut to save costs. To counteract this effect, we’ve found that conducting a pre-shipment inspection for every order, a during production inspection for the first order (often the best quality), and during production inspections for every other order following meets a good balance of reducing costs and quality exposure. This may differ depending on the product line and value of goods. It’s also advisable to make note of the first order’s production line structure and compare it to future production to make sure no steps are omitted to cut costs.
If you find an issue post-production that you would like to fix for the next order, most vendors can make small adjustments to their quality process and this is generally good enough for simple issues. For heavier, more complex adjustments to the quality process, you will need to bring in engineers and technicians. Your supplier’s R&D team is working against you, and often you’ll find your supplier is not willing to cooperate if you don’t already have a strong relationship built or have good industry credibility built. Always keep your eyes peeled for another supplier, it never hurts to have a few leads up your sleeve for when quality issues become problematic. Sometimes switching vendors is the most cost-effective fix. However, that said, never close the door with current vendor and don’t directly compare them or tell them about your new vendor. You never know where they could be of help in the future.
6) All Freight Forwarders Are Not Created Equal
Let us start by saying, be very weary of passenger cargo – it is not your friend. Ever wondered where all those random boxes going around the luggage carousel came from? Not from passengers…It’s unreliable, nearly the same price, has a higher likelihood of damage (due to the unorthodox handling and care from airport staff bag loading), long turnaround times, and of course a higher insurance cost. Quite the list, right? You have the power to choose the freight forwarder, ensure they use cargo air freight and not passenger air freight.
Second, communication is the golden chalice of freight forwarding. Always contract with a logistics provider in your own country. This way your communication channels will be clear and direct. Having someone to talk through misunderstandings, delays or discrepancies when things go wrong (and they often will) is essential to getting problems cleared up right away. One thing to bear in mind when dealing with freight forwarders is that loyalty goes a long, long way here. When things go wrong, your one-time forwarder isn’t going to go out of their way and pull strings to get something arranged for you – build a rapport and continue to grow it.
7) Provide Forecasts, But Don’t Exaggerate.
Let’s get down to brass tacks business in China is all about relations. Vendors will value the client that does monthly orders of a thousand units more than the client that does 2 orders of 6 thousand units a year. Sit down and give your order forecasts some serious thought. Albeit hard to distinguish how many sales you may hit in the first month vs. the third month, it’s better to have a realistic number than an arbitrary number you conjured on a whim, that you may have to later retract.
You really must be careful here, exaggerating your forecast and not following through can be seen a violation of trust rather than a bad projection in your vendor's eyes. Debunking your written forecasts is an immediate buzzkill and you'll notice a demeanor change within the relationship between you and your vendor instantly. They'll hold you to a lesser value moving forward.
Providing accurate and conservative forecasts and following through on them are certain to give you credibility and respect with your vendor. As you follow through on your forecasts, your vendors will hold you with even more respect. And if you cannot follow on your forecasts, keeping your vendor informed can go a long way into building a long-term relationship. It might sound simple, but often times clients will hype their sales projections on a whim to make them more attractive to vendors. Afraid of upsetting the vendor by reducing the volume of units on the next order, the client will instantly begin building stock they can’t shift or trying to negotiate a lower MOQ which is often not accepted (and even so, not taken seriously). This can lead to some unfortunate circumstances, easily avoided by clear and moderate forecasts, and finding vendors that are compatible with it.
Now that you have our 7 Tips and Tricks to Supply-Chain Success, you’re ready to go out and be your own boss, make that dream a reality and conquer the private label jungle! It can get tough out there and if you ever need guidance, support, or simply don’t have time grow and expand your product line, let us help.