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Choosing Overseas Sourcing Partner

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Choosing one’s overseas sourcing partner: do’s and don’ts

Would you place a highly engineered and order to a Chinese source you discover on the internet and choose solely for pricing? Sadly, this was exactly the case we witnessed a few years ago: a US industrial distributor was on the brink of major failure when it turned out its source was not competent. The lessons have been learned though and now we can share them.

How did this happen?

A US industrial supplier was selected by a major American automotive company to provide complicated components. The distributor found a Chinese source on the internet and selected it for manufacturing because of competitive pricing. Eventually it turned out that the source was not competent: they had never exported to the US before, let alone supplied complicated components. Crucially, it turned out the Chinese company was actually a trading company as opposed to a manufacturing one.

Consequently, they couldn’t manufacture the component correctly and thus the project was severely late. And obviously, the supplier was in deep trouble: they faced severe financial penalties and a possibility of losing its major customer.

What we saw?

The company contacted us and asked if we could help. We deployed our team to audit the Chinese source. As expected, we discovered numerous obvious red flags:

  • It turned out that there were several companies (unknown subcontractors) involved, not just one.
  • The primary factory forming the component was miles away and totally unqualified.
  • None of the following was disclosed in advance to our customer:
  • It was actually a trading company, but they did not present themselves this way—our customer believed it was a manufacturer.
  • They presented a myriad of products they can manufacture on their website, however, this is often a red flag when searching for a manufacturer.
  • Their office was in central Shanghai as opposed to an industrial park.
  • Even a quick look at Alibaba and other trade platforms offered telltale signs of a trading company.

Of course, we quickly provided a reliable alternative source that was able to bail our customer out.  And yet, proper due diligence would have avoided this stressful experience.

How do we perform our due diligence?

  • First, we prequalify the prospect: we perform background checks to validate credentials.  We have reporting mechanisms (internal and external) that we employ to do so.
  • Also, we have written and oral surveys that we ask the prospective trading partner to complete.
  • If the prospect passes the prequalification stage, then we progress to the qualification stage which usually begins with a request for proposal/quotation.
  • Should the proposal be of interest and competitive, then we progress to an onsite audit to validate/approve the prospect as a qualified supplier for the project at hand.
  • We pay attention to factors such as financial wherewithal, revenue history, years in business, export or import records, physical locations, number of employees, customer and supplier profiles and activities, equipment, trade references, ownership structure, quality accreditations (ISO, etc.…). Normally, companies don’t make these facts up, especially if the industrial company has its people on the ground.
  • The willingness to cooperate is always a good indicator of a reliable company: the good ones always welcome our involvement, while others tend to be very protective and uncooperative.

Lessons learned

Our customer company initially failed because it did not prequalify the supplier. An audit should have been performed prior to placing an order. The deficiencies of the supplier would have been exposed and the order would never have been placed. For these reasons, investigating and visiting the potential trading partner to validate their existence, capabilities and track record is essential.

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