Types of Sourcing from China
- Paul Stepanek, US Active
Before defining the types of sourcing, two basic entities need to be defined:
- A trading company – is a company that has rights to purchase and sell, therefore takes ownership of the goods.
- An Trading Office or Agency – is an entity that does not purchase and sell but acts as a commissioned agent.
Sourcing from China can follow several options:
- Purchasing from a trading company in your home country. In this instance, the trading company will add value to the chain by taking the title and risk on the goods and delivery time, while also handling all the technical and cultural issues that accompany sourcing. Typically, the trading company will add at least a 15% mark-up on the value of the goods. Mark-ups are increasingly higher if the trading company also uses an intermediary trader or sourcing company in connecting with the Chinese supplier. Another negative aspect of this option is the trader will not disclose the source of its supplies.
Supplier in China --> intermediary trader/sourcing company in China (value added) --> trading company in home country (value added) --> your company - Purchasing from a trading company in China. A trading company in China will typically operate in the same manner of those in western countries, but at a cheaper price. The main drawback of working with Chinese trading companies is the level of service and quality can vary immensely from company to company.
Supplier in China --> trading company in China (value added) --> your company. - Purchasing from a sourcing office that acts as a purchasing agency. The sourcing office does not take title of the goods and is typically paid on a retainer-plus-commission or commission-only basis. Suppliers are known to the buyer in this option, since they are exporting in their own names. A sourcing office/purchasing agency usually charges 5-10% commission for their services depending on volume and agreements in place. The lower costs and higher transparency of this option is accompanied with the buyer being 100% at risk for goods purchased. For more information on using sourcing offices, click here.
Supplier in China --> sourcing office/purchasing agency (value added) --> your company - Purchasing from your own purchasing office in China. This option works exactly like the one mentioned above, but it requires the parent company to set-up a purchasing office in China. The only question is whether your company has sufficient volume to justify the start-up costs of opening an office ($20,000-$30,000 for equipment and installation) and one or two employees ($40,000-$50,000 a year). Companies that purchase large quantities in China may find this option very cost effective versus employing a local sourcing office/purchasing agency.
Supplier in China --> your own purchasing office in China (employee wages/office rent/utilities) --> your company - Purchasing directly from the Chinese supplier. This method is the most cost-effective as no intermediary adds value along the chain, but it is the riskiest option. Without a China presence (trading company/sourcing office/your own purchasing office), your company will put complete trust in the supplier and its ability to meet quality, price, and delivery requirements. If due diligence is not performed, this option can and has been disastrous for many foreign companies purchasing from China.
Chinese supplier --> your company
Doing Business in China for Dummies has more information, including basic due diligence checklists, on how to evaluate trading companies and factories in China.
USActive is a sourcing consulting firm, based in Shanghai, China. We assist companies, from a few million dollars in sales to multi-billion giants, with manufacturing and sourcing products throughout Asia. For more information, please see our website: www.us-active.com.
Related Articles:
China Sourcing: Common Pitfalls
China Sourcing and Due Diligence - Factory Inspection Checklist
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