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Sourcing Overseas
By: Brittany Glenn
Issue: 2007aug
For offshore orders, distributors may think they can manage without a supplier partner. But the truth is they can’t afford not to.
As a promotional consultant, you may have thought about taking one of your client’s orders directly to an overseas factory and not using a supplier partner in the process. Sure, on the front end you may save a little money by sourcing on your own. But the odds are you could end up losing whatever you saved initially by spending too much time and money on issues like duties and quotas fees, insurance costs, language barriers, quality control issues, customs documents and exchange rate changes..
Many distributors have found out the hard way that the complexities and liabilities of ordering directly from offshore manufacturers can make the process more timely and costly than it’s worth. Consider these true stories from a sampling of distributors who have sourced overseas:
• A promotional consultant orders pencils from China and is pleased by his savings…until he discovers he is liable to pay an anti-dumping tax along with other duties. He ends up spending $30,000 more than he had planned.
• A distributor firm orders two million baseball caps from an Asian factory but doesn’t obtain the proper visas needed for quota items. As a result, the company wasn’t allowed to bring them into the U.S., so the distributor firm lost the money—and the order.
• A promotional consultant orders pens and pencils from Taiwan because he is quoted the best price. In the end, he discovers he is responsible for $20,000 in anti-dumping fees. He’s still paying off the debt three years later.
The Overseas Scramble
On the surface, it’s easy to understand why going directly to an overseas factory is appealing. For example, everything is cheaper in China. The average hourly pay of production workers in China is 80 cents compared to $21.86 in the U.S., according to Boston Consulting Group. That’s why China is the fastest growing consumer economy in Asia. Indeed, economies throughout Southeast Asia are thriving in today’s global marketplace.
However, ordering from overseas factories requires experience and expertise. It’s a tricky and risky venture. And for the inexperienced or unprepared, it can be a nightmare.
“Every experienced executive has heard an anecdote about outsourcing deals going badly,” reported the 2004 study “Driving High-Performance Outsourcing” conducted by Accenture. “Some say that outsourcing starts with a bang and ends with a whimper. Virtually everyone, as a result, can agree that building high-performance outsourcing arrangements calls for an unusually sophisticated blend of skills.”
In the promotional products industry, there are North American suppliers that possess these sophisticated skills and resources, and they are willing to work with distributors to source orders overseas. In fact, many suppliers have divisions set up to work with distributors exactly for this purpose. As a distributor, you’d do yourself a disservice if you chose not to take advantage of these suppliers’ expertise.
Risky Business
One of the reasons distributors have so much trouble when purchasing directly from an overseas manufacturer is the inherent risks involved in the process and their lack of experience regarding the complexities of global sourcing.
“If you choose to work directly with an overseas factory, you’re assuming an enormous amount of risk because you’re dealing with international shipping and freight, customs, duties, etc.,” says Glenda Stormes-Bice, CAS, promotional consultant for Ames, Iowa-based distributor Bankers Advertising Company (UPIC: BACADV).
“Some obvious elements of risks associated with going direct are exchange rate changes, production delays, quality of merchandise and poor communication,” says Daniel M. Krassenstein, co-owner and China chief representative for Linwood, New Jersey-based supplier BAS (UPIC: baspens). Krassenstein is based out of the company’s Shanghai office. “There are also risks involved with clearing U.S. customs and making sure that the bill of lading, commercial invoice and packing list are accurate and received on time. Trying to resolve these issues when under time pressure and in a foreign language can be a monumental task.”
David S. Engel, CAS, director of materials management for Bridgeport, Connecticut-based supplier Prime Resources Corp. (UPIC: PRIME), points out that distributors do not have the overseas quality control suppliers have, nor do they have the necessary insurance policies in place. “Suppliers are generally more aware of where best to buy product and are knowledgeable about things like anti-dumping fees,” he says. (Anti-dumping fees are additional duties imposed by an importing country in instances where imports are priced at less than the price charged in the exporter’s domestic market.) “So, the price a distributor is quoted may not be the price that’s paid in the end. There are just so many things suppliers touch on a daily basis that distributors do not.”
Why Work With Suppliers?
U.S. China Business Solutions (www.uschinabiz.com), a firm specializing in strengthening relationships between American and Chinese businesses, says in order for companies to qualify for overseas sourcing, they should be able to place at least $500,000 worth of orders annually and establish an ongoing relationship with the manufacturer by consistently placing orders.
Indeed, perhaps the best reason to work with North American suppliers to source overseas orders is because they have already built relationships with factories over time. They are given preferential treatment because of the volume of their orders and their personal interaction with Asian factory executives.
“Sourcing custom orders from Asia is all about clear communication and relationship-building,” says Jim Simone, senior vice president/chief marketing officer for Indianapolis, Indiana-based supplier Norwood Promotional Products, Inc. (UPIC: NORWOOD). “Suppliers have moved past the cultural differences and established relationships with overseas factories, which a distributor can’t do quickly and easily. Suppliers know the best factories overseas. This is where our expertise lies.
Simone describes issues distributors often face—such as credit and liability. “Duties are also part of the formula,” he adds. “You can only import so much of a particular good into the country, and if you exceed that quota then there are excise taxes charged.”
Engel agrees that the relationship factor is crucial to a successful outcome when sourcing products from Asia. “A supplier builds relationships with overseas factories because of a history of many orders, whereas the distributor is just a one-time order,” he says.
Time Is Money
Another factor for distributors to consider is the amount of time they will lose by attempting to negotiate the overseas ordering quagmire—time that could be spent selling.
“The customs, duties, freights, insurance and monetary currencies—it’s a whole different world,” Stormes-Bice says. “If you want to spend time working on those kinds of things and make this your job, that’s great, but it’s not my job. As a promotional consultant, my job is to be the interface person with my clients. The suppliers I work with are the interface people for me. They have their expertise, and I have mine.”
“There’s a lot of money involved in building relationships with overseas factories,” Simone says. “It’s not just a handshake and all of a sudden you’re in business. Money talks, and you have to be able to handle all of the risks inherent in the process. When you’re able to show those overseas factories that this is an important part of your business, it becomes part of their business. It’s a direct one-on-one relationship that only builds over time.”
Engel adds, “When you consider the amount of time, effort and money it takes to make one deal happen, distributors are not selling in that time. And this is what distributors do.” It’s true—people excel at what they spend all day doing: a writer writes well, a tailor sews well, a chef cooks well and so on.
“I’m more than willing to pay for things that I don’t know how to do,” Stormes-Bice says. “For instance, recently my bathroom faucet was leaking. Sure, I could have shut off the water, gone to Lowe’s and learned how to replace the faucet. But it would have taken me a long time—because that’s not what I do all day. I’m more than willing to pay a plumber $45 an hour to do it because he’s out of there in 45 minutes—because that’s what he does all day long. Time is money. I’m an expert at what I do, and I’m more than willing to bring people into the equation to do what I don’t have the ability to do.”
Identifying Supplier Partners
So how do you find a North American supplier with which to partner on overseas orders? Simone advises distributors to do their homework. “Ask your suppliers how many custom orders they do,” he says. “They should know how much the duties and freight costs will be and whether the products will come by boat or air. If a supplier understands all these elements, it will know the right answers. It’s important to go with a supplier that does it every day.”
Similarly, Engel says distributors should thoroughly interview suppliers. “Talk to people in suppliers’ sourcing departments,” he says. “Ask questions such as, ‘How often do you go to China? How often do you visit your factories? What are your quality control procedures? How will you communicate with me throughout the process? What is it you need from me and my client in order to best facilitate a successful program? How often do you do custom orders? Can you provide a couple of references from other distributors with whom you’ve worked?’”
Stormes-Bice assures distributors that once they work with overseas orders, they will know the key questions to ask that will allow them to determine whether or not a supplier knows what it is doing. “Look for a supplier that answers your questions without having to get back to you and is able to talk intelligently about the process,” she says.
Communication Is Key
Engel, Krassenstein, Simone and Stormes-Bice agree that communication between suppliers and distributors is crucial in overseas sourcing situations.
“As opposed to just asking suppliers for a quote, I believe if you give them more information you’ll end up better off,” Stormes-Bice says. “Tell them what the product is for, about the client’s event, etc. Don’t just tell them the quantity needed. The more information you give suppliers, the more involved and invested they become in the project. You empower suppliers by giving them more information up front. By having more information, a supplier may be able to make a decision on the spot instead of having to ask me. You have to be willing to give a little bit to get a little bit. And I’ve never had a supplier try to steal one of my clients. It simply wouldn’t happen.”
Simone adds that clear communication is critical not only between suppliers and distributors but also between distributors and clients, and suppliers and manufacturers. “How good the communication is during the process really affects the end product,” Simone says. In fact, Norwood believes communication is so important that the company has created an internal form with questions to ask distributors to ensure all specs are accurately determined before an overseas order is placed.
Krassenstein believes a partnership between suppliers and distributors where honesty prevails is crucial. “Educated distributors are the easiest to work with since they appreciate what suppliers do,” he says. “They trust us when we explain the exceptions that sometimes occur, and they know we will handle them.”
Engel sums it up nicely: “Distributors do their thing, which is to sell, and suppliers do their thing, which is to supply product,” he says. “What’s made this industry strong is that each group does what they do best and lets the other group do what they do best.”
PPB
Brittany Glenn is a managing editor for the national newsstand magazine Success from Home and a freelance writer. She is a former associate editor for PPB.
Editor’s Note: While carefully choosing supplier partners for offshore orders is a key piece of the puzzle, there’s more to the situation than meets the eye. End buyers are becoming more and more concerned with product safety in terms of what chemicals are used not only in manufacturing the products but also in the decoration methods. Social interests including child labor and environmental conservation are also important to many corporations. Watch for the September issue of PPB, where we’ll explore these topics in more detail.
Overseas Sourcing Guidelines
Here are some tips to keep in mind when working with supplier partners on overseas orders:
• Allow Enough Lead Time
For custom overseas orders, allow for a lead time of 120 days. It takes about four weeks to get a proof, between 45 to 60 days to produce the items and 30 days to ship the products to the U.S. For an order of existing products (non-custom), allow for a 90-day lead time.
• Have A Plan ‘B’
When it comes to custom orders, ask clients a lot of questions so you’ll know what to do if pitfalls arise. It’s possible the overseas factory won’t be able to make the product exactly as the client requests, so discuss alternatives in advance.
• Be Specific
Suppliers need to know all the specifications—size, color, quantity, material, target price, printing specs, deadline, samples and packaging.
• Know Your Client’s Priorities
Discuss what is most important to your client—is it price, quality or speed of delivery? Providing this information to your supplier will enable it to identify the best factory for the job.
Sources Mentioned In This Article
Norwood: custom@norwood.com, 877-547-3401
Prime Resources: dsengel@aol.com, 203-331-9100 ext. 3313
BAS: baspens@baspens.com, 800-843-6484
GLOBAL STRATEGY COUNCIL DEBUTS
In today’s global marketplace, sourcing is no longer the issue—sourcing wisely is,” says Paul Kiewiet, MAS, PPAI chairman and vice president of distributor Incentive Marketing, a CorpLogoWare affiliate. “Since consumers are demanding higher standards in product safety, quality and social responsibility, we as an industry must be proactive and demand that our supply chain meets the standards of an educated and aware international community to ensure that PPAI members are recognized as the most credible, most responsible and best sources for promotional products regardless of where those items are produced.”
To that end, PPAI has formed the Global Strategy Council to provide leadership and develop a plan of action and strategic initiatives to move the Association and the industry forward in an evolving global marketplace. The Council will focus on strengthening the traditional industry business model of creating value through promotional products supplier and distributor channel partners on an international scale.
“The Global Strategy Council will build awareness, create alliances and establish benchmarks to give PPAI members the knowledge and tools that will help them develop promotional campaigns with products that were manufactured overseas,” says Steve Slagle, CAE, PPAI president and CEO. “As a result, all members of the distribution channel will be better equipped to create and deliver value.”
The Council has five main objectives:
• Deliver an on-going, short- and long-term strategic plan for the Association to address global marketplace opportunities.
• Establish education curricula for global manufacturers and member suppliers.
• Establish global industry standards for social and environmental responsibility, intellectual property protection, human rights advancement, product safety and quality, and manufacturing certification.
• Develop venues and programs for meaningful dialogue between global manufacturers and PPAI member suppliers.
• Develop global opportunities for PPAI members to export products, services, knowledge and distribution networks.
“The Global Strategy Council will examine best practices, create educational programs to benefit both suppliers and distributors and analyze the global market from bottom to top,” Slagle says. “We are committed to equipping our members with the education and tools needed to deliver value at each point in the distribution process.”
“Can our industry influence the business practices of a global community?” Kiewiet asks. “This remains to be seen. However, it is our responsibility as an Association to help our members adapt and thrive in a dynamic and complex international market. This is the Council’s charter.”.
In addition to the PPAI president and the chairman of the board, Council membership will include PPAI member suppliers and distributors, major consumer products end buyers, testing lab representatives, a global consultant/facilitator and other supply chain representatives.
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