Insist on a Bank Account When Paying a First Sample Charge

You’re planning to manufacture a product in China, and a new supplier asks you to pay an initial sample charge. At this stage, you’re focused on ensuring the manufacturer understands your product specifications and quality standards, and the initial sample is an important step in that process.

But if you think of the initial sample only as a means of checking product conformity, you’re missing an opportunity to vet this potential supplier more fully. Indeed, you can use the sample charge as a quick and affordable way to verify the supplier’s identity.

Now, before I continue, I should stress that you must not rely on one method alone to verify a supplier’s identity. For one, you should ask for a copy of the supplier’s business registration and check that the company name and address match the contact information you’ve received from them. The most dubious of would-be suppliers will not reply to your request, which means you can immediately scratch those suppliers from your list of candidates.

Another way to verify the supplier’s physical location is to have your courier pick up the initial sample from their factory. If they send it to you, you’ll have no way of knowing where it came from. But if you ask Fedex or DHL or TNT to pick it up from their building, you can match the collection address to the address on the business registration.

So, after a series of emails, you’ve whittled your initial list down to 2-3 prospects. Depending on your budget, you might ask each manufacturer to produce a sample. Here’s where you use the sample charge to further verify the supplier’s identity.

When invoicing you for the initial sample, a Chinese manufacturer will oftentimes ask you to pay by Western Union or PayPal, because the transaction cost for sending and receiving small sums can be significantly less than a bank transfer. Certainly it makes economic sense to use either of these payment methods, but it’s a wasted opportunity.

Instead, you should insist on paying a new supplier’s initial sample charge by bank transfer. Why? It’s simple: when you wire funds into a bank account, you need the beneficiary’s correct legal name and address.

Chinese banks are generally careful to verify the identity of a person or company when opening a new bank account. PayPal does not verify identity as thoroughly as a Chinese bank, and Western Union payments are generally sent to an individual.

When you pay by either of these two methods, the payment is not doing much to help you verify the supplier’s identity. By contrast, you will know exactly with whom you are dealing when you pay by bank transfer.

This tactic can certainly help weed out fraudsters, but that’s not my primary concern. More interesting is what the name and address of the beneficiary can tell you about the supplier.

You might be surprised to learn that the recipient of your funds is NOT the person or company you have been emailing. I’ve seen all kinds of situations, such as where payments are sent to a parent company, a trading company, or even a manager’s personal bank account.

If a manufacturer claims to have hundreds of employees making products for clients all over the world, yet they ask you to make a payment into someone’s personal bank account, you can be sure they are not who they say they are. At this stage you may wish to scratch them off your list of prospects or send an inspector to perform a factory audit.

Personally I won’t do business with a manufacturer that does not have a company bank account. Period. I don’t care what story the salesperson gives me about how the bank account belongs to the owner’s wife and they are using it to avoid paying taxes. It doesn’t matter, I simply don’t want to deal with them.

Yes, it costs more to wire a sample charge by bank, but the extra cost is well worth it. Once you’ve paid the initial sample charge, by all means use Western Union or PayPal to send funds for a second, third or fourth sample. But always insist on paying an initial sample charge by bank transfer.

It’s a simple point, but you’ll learn a lot from using this tactic. Ultimately it’ll help you weed out less-than-ideal suppliers.

Posted in Finance, International Trade, Money | 3 Comments

Quality Control vs Risk Management

As an importer, you spend much of your time managing risk in your business as well as worrying about quality issues. Staying in business depends on it.

Since these two areas of your business are so critical, it’s important to clarify in your mind the difference between risk management and quality control. Indeed, confusing these concepts can lead to many problems.

Let’s start with risk management in the context of your relationships with overseas suppliers. Here are a few common risk factors which may keep you awake at night:

  • Will my supplier ship on time?
  • Will my supplier offer stable prices?
  • Will my supplier ship goods to specification?

With a risk management approach, the importer looks at such questions and then devises a way to mitigate harm should things go awry.

For example, if you are worried about a supplier shipping on time, you might use a Letter of Credit as your payment method which stipulates a firm deadline or else the vendor does not get paid and the order is not shipped. That’s a risk management strategy designed to motivate your supplier to finish production on time.

Now let’s say you are worried about a supplier increasing prices suddenly, leaving you in a difficult position. To address this concern, you might decide to develop relationships with several competing suppliers. Having the option to shift production from one supplier to another helps to manage this risk factor.

And then there’s the question of whether goods are manufactured to specification. It’s all too common for manufacturers to produce defective or nonconforming goods which cannot be sold. You had better be prepared.

Taking a risk management approach to this problem, you might decide to always order the smallest quantity possible. Even if the entire shipment has to be written off as damaged goods, at least you have mitigated the harm done. You can swallow the loss if the order is relatively small. Sure, it hurts – but at least you stay in business and life goes on.

Now here’s the important point: you need to realize this kind of risk management approach only helps protect you from catastrophic supplier failure. It does nothing to ensure quality.

From the supplier’s perspective, there is no difference between an importer using this risk management strategy and another who is not. The manufacturer does not know or care about your risk management strategy, meaning there is no clear incentive for them to manufacture the goods properly.

That’s why, if you are truly concerned about quality control, you need to implement a quality control mechanism. Risk management is not enough; the supplier must understand in advance there is a “clear and present danger” to them if they manufacture nonconforming or defective goods.

At the very least, I would recommend hiring the services of a quality control inspector to screen shipments before they leave the manufacturer’s premises. Your supplier will have a powerful incentive to manufacture to specification if they understand getting paid depends on passing quality inspection.

If quality inspection is not something you have done in the past, I strongly recommend reading up on the topic at Renaud Anjoran’s highly-informative quality inspection blog. Renaud has published oodles of great content to help you start thinking about what kind of quality control mechanism is right for your business.

Quality control is an important part of your job as an importer. If you combine quality control with risk management, you’ll not only sleep better at night – you’ll have happier customers too.

Posted in International Trade | 2 Comments

Talking Fabric Weight with Chinese Suppliers

When sourcing any product with a fabric component, you’ll need to discuss the specifications for the fabric with your supplier.

Two key measurements when discussing fabric are thread count and fabric weight. That sounds easy enough, right? Well, thread count is pretty straightforward, but unfortunately fabric weight is another matter when dealing with China.

There are basically two correct ways to measure fabric weight: you can measure it in grams per square meter (metric) or ounces per square yard (imperial). In my work with Chinese factories, I have found it difficult to get suppliers to commit to one system or another.

For example, let’s say I am sourcing a product that requires 16-ounce cotton canvas. A factory might tell me, “Sure, no problem. We can get 16-ounce canvas.” Now here’s the tricky part: I will then ask them if they mean the canvas is 16 ounces per square yard.

To that question, a standard reply might be: “Yes, we measure the fabric in meters” or “No, it is 16 ounces per square meter.” Here the “yes or no” will depend on whether the factory salesperson understands the difference between yards and meters. You should not assume they understand this difference.

Chinese are educated in the metric system and they will generally default to metric measurements unless you, the buyer, clarify this point. Because many customers are American, the fabric suppliers have learned to use “ounces” as a guideline for fabric weight, but often they are still buying and measuring the fabric in meters.

So let’s go over the math here. The supplier is saying the fabric weighs 16 ounces per square meter. Well, 1 meter is roughly equal to 1.094 yards so 1 square meter is roughly equal to 1.094 x 1.094 = 1.197 square yards. Let’s just round up to 1.2 square yards for simplicity.

(In fact, 1 square meter is equal to 1.1959906 square yards — but this level of precision is usually unnecessary when sourcing most soft goods like apparel and bags.)

OK, so if the supplier says the fabric is 16 ounces per square meter, we can make the following calculation: 16 ounces per square meter x (1 square meter / 1.2 square yard) = 13.3 ounces per square yard.

Well, there is a big difference between 13-ounce canvas and 16-ounce canvas. Imagine you order bags made from 13-ounce canvas when you were expecting 16-ounce canvas. That could literally destroy the commercial value of the product if such light canvas is not suitable for the product design.

One solution to this communication problem is to use grams per square meter when stipulating the specifications for an order. Since Chinese are educated with the metric system, they will understand exactly what you expect when you ask for fabric that weighs 543 grams per square meter (which is roughly 16 ounces per square yard).

Even if you communicate in grams per square meter, the problem might arise that your supplier is not comfortable committing to such an accurate measurement. Here specifying a tolerance, such as +/- 5%, is good practice. So, in the above example, you might order canvas that weighs between 515 and 570 grams per square meter.

I recommend that you attempt to get such a commitment from your supplier. In this way, buyer and supplier articulate and agree upon an acceptable range for the fabric weight. A reputable supplier should agree to a clear standard of measurement and tolerance range.

Now here’s one thing to watch out for: the factory representative may revert back to speaking in ounces later in the conversation. She may have learned that overseas buyers prefer to speak in ounces and so it becomes a habit for her. Alternatively she may prefer the brevity and simplicity of saying “16 ounces” rather than 543 grams per square meter, +/- 5% tolerance.

It’s important to keep in mind that, even if you decide it’s OK to use ounces informally in your discussion, you should absolutely get the specifications nailed down accurately with the correct unit of measurement before placing your order.

Otherwise you might be in for quite a surprise.

Posted in Design, International Trade | 16 Comments

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