Supplier Selection De-mystified

By Bill Quarless
April 2007

{Note: This featured article appears in the April 2007 issue of Electronic Retailer. Click here to read it on the Electronic Retailer site.}

One of the most critical aspects of any DRTV project is finding the right supplier. Few things will kill a campaign faster than defective returns, delayed shipments or slow production. Additionally, when selecting a Chinese partner, other concerns arise. You must worry about confidentiality and protect against knock-offs and back-door shipments--as if the communication issues, geographic distance and cultural differences weren't daunting enough.

A related problem is the sheer number of suppliers from which to choose. Recent estimates put the number of Chinese factories at more than 200,000. And as China continues to boom, dozens of additional factories hungry for business open each day. Many have fancy catalogs and slick websites, and few--if any--will tell you up front that they aren't the right factory for your product. So how do you choose?

At first, the task might seem overwhelming. But the good news is that a little homework and a systematic approach can make the process a lot more manageable. We've spent the last decade developing just such a system, which we call our "Supplier Selection Model." Any company that buys product from China can benefit from it. It's essentially a two-step process: First, identify a large pool of potential suppliers. Second, systematically eliminate suppliers to find the best possible match for your project.

The first step is to create a database of potential suppliers. The key word here is "potential" because, as mentioned above, it's impossible to tell up front if a supplier is a legitimate candidate for your business. This is an ongoing process, but the database will grow quickly with input from various sources. These include referrals, word of mouth, Chinese trade shows, websites and Chinese trade organizations--to name just a few.

The key is not to wait until you desperately need a factory to start looking. We currently have an electronic database and catalog library of more than 3,000 factories. All have been pre-screened and categorized into one of 23 product categories. In addition, we're always on the lookout for new suppliers, so our database grows daily.

The second step in the process is to evaluate the factories in your database and use a process of elimination to find the best one for your particular project. We conduct our evaluation based on the following criteria:

Experience - The single most important factor is experience. A factory's management can quote you the best price and make all the right assurances, but they must have experience. To discover if that's the case, you always want to know: What similar items have they made? What companies have they manufactured for in the past? More specifically, does the factory specialize in your particular product? We've seen large, successful factories with great general experience struggle with a simple item that was new to them. So we eliminate all non-specialists.

Communication - It's important to determine early on if communication is going to be a problem. It may seem like a no-brainer, but you always have to ask: Do the factory managers understand English? Can they clearly understand your needs? The speed of communication also is a good indicator of the kind of experience you're going to have. If management is too slow in responding, we remove the factory from consideration.

Production capacity - This is another critical factor, especially when you have a hit on your hands. You'll want to know: What is the factory's daily production capacity? Will it be able to meet your requirements, or will management have to sub-contract the work out to other suppliers (that may be substandard)? The factory managers should be able to clearly explain their maximum daily capacity based on the number of production machines and workers they have on staff.

Location - The geographic location of the factory is also an important--and often overlooked--factor in the elimination process. Experienced buyers know that goods produced in China are assessed a Value Added Tax (VAT). Some percentage of the VAT is rebated to the factory upon export of the goods. However, the VAT rebate rate varies from province to province. All other factors aside, your product could cost you 10 percent more just because you bought it from the wrong province.

History and Reliability - The key question here: Is this a reputable and reliable factory? A little homework in the early stages can save you a lot of headaches, time and money later on. There are several organizations you can utilize to check the history of the factory. Several are Chinese government organizations similar to the Better Business Bureau, and there are some paid services that can provide in-depth background checks as well.

Export licenses - Every Chinese factory that manufactures product for export must have the appropriate export license. Many factories in China only manufacture for domestic use and, as a result, do not have the necessary licenses to export goods. We have seen many shipments get delayed--and costs increased unexpectedly--because an export company needed to be hired at the last minute. Confirming the appropriate export licenses in advance must be a part of your process.

Certifications - Many products require certification before they can be used in the United States. Some examples are UL for electrical products and FDA approval for food items. It should be established early on that the factory is capable of securing the certifications you need. And here again, it's experience that should be your ultimate guide. Managers who claim they can make your product to standard, yet have no history of securing the necessary certifications, should be eliminated.

Price - Once you've gotten this far, the next step is to get rough pricing from the remaining candidates. Unless your product is an open item with no need for confidentiality concerns, you should use a similar item to get pricing from factories. Be very clear and consistent in your inquiries to ensure the quotes are based on a fair comparison. Eliminate quotes that are too high above your range, but also be cautious of those that are too low. Many factories will quote under cost, only to raise the price prior to production, or gouge on mold charges.

Quality - Request "quality reference" samples of a similar item they have made. Check these samples carefully, and compare them to the other samples received. Ask yourself: Is the material the same? Is the quality and workmanship up to your standards? Eliminate factories that don't meet your standard of quality.

Factory inspections - Now comes the final and most important step: the factory tour. This is your opportunity to confirm and verify all that you've been told. There are many questions that should be answered and confirmed during this visit, among them:

  • Do they have the machines required for your production?
  • Do they have enough workers?
  • Are the workers properly trained?
  • What type of quality-control measures do they have?
  • What testing do they do?
  • Who else do they manufacture for, and for how long have they been a customer?
  • Do they retain customers for a long time? If not, why?

The reason this final step is so critical is that many factories, in reality, bear no resemblance to the presentations in catalogs and on the Internet. Plus, the biggest, nicest and newest factory isn't always your best bet, either. Remember, someone is paying for all those bells and whistles!

Each of these factors must be taken into consideration when choosing the best factory for your product. Above all, before revealing your confidential product, you should feel 100 percent comfortable with the factory you've chosen. A small investment in effort and time early in the process will save you time and money in the long run.

Four Pitfalls to Avoid When Choosing a Factory

Basing your decision on a catalog or website. We've seen many factory managers "borrow" pictures to create their marketing materials.

Relying on the same factory for all your products. Specialization is essential. If you make a simple plastic item at an electronics factory, you'll end up paying the overhead for all those electrical engineers you aren't using.

Letting size and beauty affect your decision. Some of the best products we've ever seen have come from factories we'd be embarrassed to show a client. Many old-school factory bosses put all their resources and efforts into the products they make instead of the building and grounds around them.

Getting seduced by English-speaking salesmen in business suits. In our experience, the best factories we've ever worked with are those run by former factory workers, not college-educated businessmen. They understand every process in the factory and usually don't need to rely on others to understand your product and needs. Additionally, they tend to be more focused on doing a good job and less focused on making money.