Indirect Sourcing vs Direct Sourcing: What is the best approach?

Importing from China has never been a decision made overnight. Importers have many options to weigh and lots of research to do when considering moving their supply chain to China. One barrier has always been – how? What is the best approach to buying from China? The best approach to sourcing in China depends on your specific needs. There are two approaches to consider: Indirect sourcing and Direct Sourcing.

Indirect Sourcing

Indirect sourcing means you are buying China merchandise through a third party, like a trading company or an importer.  This usually means that you are buying off-the-shelf, i.e., not a customized product. The costs are higher, but there is less risk, and cash flow is easier to manage.

Direct Sourcing

Buying directly from China means going straight to the source, i.e. the manufacturer. By going straight to the source, importers get the lowest first costs but the highest risks. It can also strain your cash flow.  To mitigate risks, you need to manage the process carefully. Many importers use on-site third-party representatives, like a sourcing agent or a full-service provider to control this better. 

So what option is best suited for you? How do you get the best value from your supply chain? And what type of support structure will you need to get it?  To decide, you will need to consider the following value factors: 

– Price: Direct sourcing gives you the lowest cost.
– Quality varies, but it is easiest to monitor with indirect sourcing.
– Volume: MOQ (Minimum Order Quantity) is lowest with indirect sourcing.
– Customization is a big factor. Unique products require direct sourcing, but sticking on a label can be done with indirect sourcing.
– Convenience: Indirect sourcing is much more convenient – but you pay for that. 

Levels of Indirect Sourcing:  

– Trading Companies tend to be product specialists. They buy in bulk directly from the manufacturer and re-sell to you. This approach is low risk, relatively low cost, and quite convenient, assuming yours is a  reputable supplier. If your company purchases a fairly large volume of existing products and doesn’t require a unique product or any customization, indirect sourcing would be beneficial. 

– Distributors and/or wholesalers are also product specialists who buy directly from the manufacturer, but they do the heavy lifting on the sourcing process. By the time you buy from them, the goods are in a warehouse in the USA. Here too, customization is usually not an option, but buying from them is most convenient.

Direct Sourcing means contacting and benchmarking suppliers directly, negotiating contracts and pricing, ensuring quality conformity, managing the production process, and making all logistical arrangements.  To manage this process you need resources. 

How to Manage Your Supply Chain Directly:

– With your own China office, you get the most transparency and control, however, it also requires the most investment of time and money. A satellite office in China with a full sourcing team of your own makes sense for larger corporations that import at least $5 million a year. 

– With no China sourcing office: Managing a supply chain on the other side of the world from a US-based business can be done.  It requires communications to be held during China business hours – for meetings, calls, and a quality assurance process. Also, you may need to travel to meet with suppliers from time to time. To facilitate this, most importers invest in a variety of methods such as: :

– Hiring a USA-based employee who speaks Mandarin and is familiar with the Chinese culture. 

– Employing a China-based employee who speaks English and is familiar with Western culture.

– Signing on a China-based agent, usually on a commission basis.

Alternatively, you can manage direct sourcing with a China sourcing company that provides all the benefits of your own sourcing office without the overhead or the management burden.  

Each approach offers different benefits, and each has its own drawbacks. Importers must choose based on their needs and what is important to them. 

Which approach has worked for you? And why? Share your thoughts with us in the comments below. 

Editor’s Note: This blog was originally published in July 2021.