- Growing competition, economic turbulence and high taxation costs are just a few factors that impact small business profits.
- More businesses are turning to overseas sourcing to reduce manufacturing costs.
- Manufacturers and suppliers are catering to this market with more products becoming available in lower quantities.
- In this article, we look at some of the ways to lower costs when sourcing from overseas and how to build good relationships with suppliers.
Most small businesses are doing it tough. This is not only due to worldwide economic conditions, but also because Australia is near the very top of the list of most expensive countries to do business, with high costs including taxation, and a high level of living standards.
There is also a lot of competition within what is really a very small market.
The two obvious ways of maximising the potential of any business is by increasing profits and/or reducing costs.
There are several ways to increase the opportunities to increase profits, such as marketing (traditional or via social media), having a business coach, websites, SEO, just to name a few.
I am a firm believer that Australians generally have a good reputation overseas for product quality and work ethic, and should therefore be doing more to open up overseas opportunities for Australian business to help increase sales opportunities (but that’s another topic).
The area I want to talk about is one way in which a company can reduce their costs, slanted towards those companies that sell a product rather than those offering services.
Traditionally, small Australian business has relied on wholesalers to purchase their stock. The wholesaler buys in large quantities from overseas and then distributes smaller quantities to small business.
History tells us that many small businesses didn’t buy enough quantity to make it effective to buy from overseas, whereas wholesalers had the buying power to be able to do it.
There are both positives and negatives in this as on the one hand:
- the importer/wholesaler is marking up the cost of the goods, sometimes substantially, which makes the product expensive by the time it gets to the consumer; and
- the selection of products available is dictated by the wholesaler and large buyers.
Whereas on the other hand:
- it allows the small business to buy much smaller lots as and when they need them;
- cash flow is not being tied up with large stock levels; and
- there is some ability to know what are the popular products being sold and stock accordingly.
The good news is that things have been, and continue to change.
Partly due to the advent of online sales platforms, as well as sites like eBay and Amazon, it is now much easier for a small business to look directly overseas for their products.
Increasingly, manufacturers and suppliers are catering to this market with more and more products becoming available in lower quantities.
So there will often come a time for many a small business, where they start to think about sourcing their products directly from factories or suppliers in China, or other low cost countries.
This can be a very rewarding process in terms of the potential savings gained from buying direct, but the process comes with associated risks.
These risks can mostly be mitigated, but nevertheless, buyers should be aware that buying merchandise/stock from overseas is not the same as buying from the wholesaler down the street.
Top Considerations When Sourcing Products from Overseas
Here are a few of the things I would consider when thinking about sourcing my products from overseas:
- Buy direct or get assistance
- Get samples
Pricing is obviously a very important factor when considering buying from overseas, but in my opinion should never be the only consideration. Time and time again I have found that the cheapest price often means getting the poorest quality products.
It is really the responsibility of the buyer to at least have a reasonable idea of what a product costs and what quality you should get for that price. I can buy a bag for $1.00, and I can buy a bag for $50.00. Which one is the most appropriate for my market and my customers.
It’s not always easy to do, but in the end, cut costs too far and quality suffers. It can be amazing how much better a product can be when a few cents more is spent per piece.
Added to this, the buyer needs to know the total costs to get their goods. This will include the product costs, shipping costs, any import duties or taxes, local charges etc. And also any testing costs associated with making sure the product meets local safety standards.
It may be that after taking all this into account it is still better to use the local wholesaler, or even a wholesaler from overseas when the quantities required do not warrant a manufacturing run.
2. Buy Direct or Get Assistance
There is an argument that buying directly from the factory saves money, as using an agent will add to your costs. On the face of it, it’s a fair comment, but dig a little deeper and understand what an agent can do, and the argument doesn’t hold water.
There is plenty of information available, for anyone prepared to do some research, to allow an inexperienced person to start buying their products from overseas. Plenty of forums, blogs and advice (all free) which covers pretty much every angle.
Read enough and you can see from all the comments which are the most common methods used, and if they are common, they must be working.
But there is also an argument that I could do my own accounting, or create my own website from an online template. Question is, would it be as good as if someone with more experience had done it.
To put to bed the argument that agents add additional cost, the largest retailer in the world, Walmart, has thousands of staff worldwide, including several hundred in China, who is responsible to source products.
And yet, they use sourcing agents and trading companies to source products. If they are using them, then you can be sure it is of benefit to them.
In any case, if you are thinking to use an agent, you need to understand what they will be doing for you to make sure that they are doing something worthwhile for their money.
3. Get samples
Sampling is extremely important at several stages of the buying process. At the very least, getting samples should be:
- At the outset: To see the quality of product offered by that supplier.
- Pre-production: Sample to confirm that your proposed product is the correct colours, has correct printing etc. based on your requirements. This can include packaging.
- Post-production: Sample arranged at the end of production to make sure production quality is satisfactory.
And after all that, if still not comfortable there is the option to have a third party inspect the products before being shipped. (Goods should rarely be 100% paid for upfront as if there are any problems you may lose your leverage in having those problems rectified.
For standard purchases the normal terms for a new buyer would be to pay 30% deposit, then 70% just before the goods are shipped.)
The Importance of Building Strong Relationships with Suppliers
It is often mentioned how important it is to develop relationships with your supplier. This is very true, but one thing that needs to be remembered is that relationships take time. They do not happen after the first order, and it can be many orders or even years before real trust takes shape.
At the initial stages of dealing with any supplier, just as you feel anxious about your supplier, they are feeling exactly the same about you.
If anything, it is important to follow up on anything that is arranged. Don’t trust that what you asked will be done, and never “set and forget” a deal in the hope that everything will work out the way it was planned. Constant follow up is vital to make sure you get what had been arranged.
Ok, getting a bit long-winded now, so hopefully the above offers some initial ideas for anyone looking to, or is already buying products from Asia, specifically China.
The above comments are based on my experience of being based in Hong Kong and having a company sourcing products on a daily basis for over a decade. For more general details about sourcing from China please feel free to visit my website devoted to sourcing from China at:-
www.asiasupplierreview.com (in the forum section) (Note: This website is separate from my normal business, is totally free, does not generate any income and is meant only as a tool to offer advice and generate discussion.)
And for anyone with any questions or comments on this forum please feel free to let me know and I am happy to answer any general questions you may have about sourcing or expand on the issues mentioned above. If there is enough interest in a particular topic I may be able to write about it.
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