Are You Leaving Money On the Table? Part 2 – Trading Companies

Are You Leaving Money On the Table? Part 2 - Trading CompaniesBefore we get started: Good communications

During my last blog I got some valuable feedback on the importance of communications when sourcing from China.  That was such a good point.

We have some clients on the East coast who complain about how difficult it is to communicate with their West coast office, and even though we think we speak the same language, I sometimes have a hard time communicating with my kids.

So imagine how hard it is when you communicate with China: 12-hour time lag, different language, and different culture.  So yes, communication is important, it is, in fact crucial, especially when your business depends on it

Lets keep in mind that:
–       Communication is a skill, no one is endowed with it, and it has to be learned. It can’t be taken for granted.
–       “The most important thing in communication is to hear what isn’t being said.” (Peter Druker)

So when you evaluate Trading Companies, Agents or your own Sourcing office in China, communications must be a key consideration.  You must be comfortable that your message will get across. You should have a good interlocutor, fluent in English, responsive and predictable.  Ideally most of the communications should be in writing to work around the time lag and to improve accountability.  But you should also keep in mind that your main concern is whether the supplier itself has a good grasp of your concerns.   And the supplier is the factory, which usually uses Chinese.  This means that, with the possible exception of the Trading Company (who sells you their merchandise and is therefore the prime supplier, as far as you are concerned) you need to make sure that your communicator is good and well organized and that he/she communicates well, not just with you in English but also in Chinese, in an accurate and verifiable manner, with the right person at the factory.


OK, so the title ” Are You Leaving Money on the Table?” is a bit dramatic, I admit it, but it got your attention, did it not?  Moreover, people who are sourcing from China do so because they want to save money, so trust me, they don’t like to leave money on the table.

Buying directly from the factory is the best bet to get the best price, but doing this efficiently is not always that simple.  You need “feet on the ground” know-how to help you with the process of dealing with the manufacturers.  Let’s look at the 3 most common interfaces importers use: Trading Companies, Agents and their own China Sourcing office. 

What are Trading Companies?

Trading companies by definition, buy and sell, they take title to the goods they handle. This means that:
–       They buy the goods from the factory and then re-sell them to the importer.
–       Product specialist: Often, they are specialists in certain product families.   Like automotive spare parts for example.
–       Relationship with the factories: They handle the relationship with the factories and use their buying clout to get results, and to secure lower costs (for themselves).  This usually means very little transparency as to who the factories are.
–       Warehouses: They usually have their own warehouses in China/Asia and sometimes in market destinations like Europe and the USA.
–       Accountability: High. Because they take title, they are accountable for any issue of quality or delivery.  The buck stops here.
–       How they make money: They keep the difference between their factory costs and the price you agreed to.

The benefits of dealing with trading companies include:
–       A good “one-stop shop” for those who seek to buy small volume each of many different SKUs of certain product families, but a fairly large ($1 million or more) annual volume of goods.
–       Less hassles for MOQ (Minimum Order Quantities) as long as you buy “standard” products. (i.e. Products that can be resold to others.)
–       Design and new ideas: Since they tend to be product specialist, they can share with you emerging trends they see in the factories they use or they see with their other clients.
–       Sample development: They are usually efficient in delivering samples, as long as they fall within their product category.
–       Logistics: Consolidation and regular, flexible shipments. (i.e. Every month you get one container with various quantities of say 1,000 SKUs.)
–       Quality assurance: Good peace of mind on that front.
–       Payment terms: Depending on the relationship they sometimes offer good payment terms.
–       No fixed overhead.

The downside of trading companies includes:
–       Prototyping: They are usually not set up to develop products from scratch.
–       Serving startups:  They usually prefer to handle companies with well-established sourcing programs, not startups.
–       Provide access to factories: This can be a problem in case of audit etc.

The types of companies that like to do business with trading companies are:
–       Large Retailers
–       Distributors and wholesalers
–       Buying groups

The types of companies that generally don’t like to do business with trading companies are importers.  The reason is that there is often a conflict of interest: trading companies tend to sell to their clients.

Do you agree with the above description?  What has your experience been with Trading Companies?

by Guerschom Francois



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