The decisions facing today’s buyer when sourcing products from China are numerous.  Factories, trading companies, wholesalers, distributors, purchasing agents and the like.  This can be an overwhelming situation because of the sheer number of choices.  Is there any difference between each of these?  What is the most cost efficient option for you and your Chinese products?

Most think the direct route – going to the factory – is the best and most cost-effective way to source and purchase products.  Others feel trading companies and purchasing agents are far more effective.  Trading companies understand the Chinese business world and thus, worth the expense.

SourcingNova’s goal is to help buyers reduce the total cost of procurement across the board.   The primary way we help you meet this goal is choosing the right type of supplier. We are the first to admit – the purchasing agent is not always the absolute best decision.  The why of this is coming later in the article.

Because Sourcing Nova does not want to burden you with unnecessary information. It is the goal of this piece to treat trading companies, wholesalers, and distributors as the same type of supplier – trading companies. We first look at the differences between manufacturers, trading companies and purchasing agents. Second, we look at selecting the supplier based on your specific business type. Lastly, we provide solid advice based on our extensive experience on how to work with the different suppliers.

Sourcing Nova’s goal is to help you find the best Chinese supplier for you and for your goods.  We are going to look at the following areas in particular:

  • Target Customers
  • Product Range
  • Profit Model
  • Protection for Buyers
  • Product Knowledge
  • Custom Made Ability
  • Costs and Fees
  • Communication Efficiency
  • Accessibility
  • Difficulty and Risk
  • Product Sourcing Options
  • Supply Chain Knowledge

This is a great deal to cover, so let’s get started!

Target customers

It is important to realize as we begin the target customer of each of the three –  manufacturers, trading companies and purchasing agents – all vary.  Their situations and development strategies for their business determine which is the best to use.

 

  • Target customer of the manufacturer

This particular customer will have a substantial order volume, a single product and regular, repeated orders.  The factories are normally busy.  They are focused in on controlling production schedules and product quality.

This means the factory is consistently working on the elements that keep production running – normal machine operation, raw material pricing and shipping and a strong base of skilled labor.

These are important to the factory, and it also means the factory does not have time to teach new buyers or the patience to wait on new buyers to grow their business.  These manufacturers in China do not have a strong Internet presence because of these other factors.  What information you may find on their website is dated and hardly has any value.

If you are interested in sourcing products directly from Chinese manufacturers, it is necessary for you to meet the following criteria:

  • Experience importing from China;
  • Full understanding of import regulations and procedures
  • A real, tangible order – not a vision and blueprint diagram;
  • All of the manpower and resources to manage the entire import process.

 

  • Target customer of the trading company

These target customers are basically the same as the factory customer – with a few differences.

The target customer of a trading company is a professional buyer well familiar with the products they want.

Here is a good example: a kitchen supply store chain needs pots, pans, dinnerware, cups, glasses and the like. These products all come from different manufacturers and can be difficult for a professional buyer to sourc directly from so many manufacturers.

The trading company will take care of all of the individual sourcing and send one large order to the buyer.

There is not much daily oversight of the production line. Trading companies can devote their time and energy to customers and customer service. Some trading companies can wholesale and dropship.

Their target customers always buy the same products, and white-label products can go to different buyers for profit.

If you know your products but do not have understanding of importing products from China, a trading company is your best option.

 

  • Target customer of the purchasing agent

Purchasing companies and their agents work with a variety of different customers. Many claim to be able to help and source for any buyer of any Chinese product.

Purchasing agents will work with experienced and novice buyers equally.

If you are unfamiliar with products and do not have any experience importing products from China, the aid of a purchasing agent is your best solution. Many purchasing agents take on new businesses and customers with the explicit goal of helping the business grow and succeed.

Section summary: Target customers of purchasing agents > Target customers of trading companies > Target customers of manufacturers.

 

Product Range

When it comes to sourcing high quality products from China, the sheer number of products is substantial.  However, each of the three who source products vary in product range and variety.

  • Product range of the manufacturer

Most Chinese manufacturers specialize in a single production and sale of a particular product.  The product depends on the production machinery, craftsmanship and skill labor force.

As an example, a manufacturer that makes ceramic mugs will not make glass or stainless steel.  These are all three mugs, but the production process, necessary equipment and raw materials are completely different for each.  If your business goal is to sell mugs of a variety of materials from Chinese manufacturers, you will have to work with several different manufacturers.

 

  • Product range of the trading company

The trading company will also have a single product focus.  The trading company often has a solid cooperative relationship with various factories within a single industry and are well aware of the advantages and disadvantages of each factory.

A trading company that sources mugs will source mugs of various materials – ceramic, glass or stainless steel.

 

  • Product range of the purchasing agent

Purchasing agents have a wider range of products. Their understanding of a single product may not be as good as that of manufacturers and trading companies, but thanks to their deep understanding of the industry chain and streamlined operations, they can meet the diverse needs of customers.

Section summary: Sourcing Agent Product Range > Trading Company Product Range > Manufacturer Product Range

 

Profit model

All businesses need to make money.  It is how the business pays for raw materials, labor, associated costs and salaries.  It is no different for the three Chinese suppliers.

 

  • Profit model of the manufacturer

The manufacturer has a straightforward profit model. Their profits come from the difference of the cost of production and the selling price. ODM and OBM have considerable more diversification, but the main product amount comes from the production and selling price differential.

Their profit models fall into one of the three products manufacturered:

  • OEM – The profit comes from the difference in sales and production cost
  • ODM – The profit comes from design fees – but are not the main revenue source
  • OBM – The profit comes from brand premium

Related Post: OEM, ODM and OBM – A Primer On Each

 

  • Profit model of the trading company

Trading companies earn the difference between the selling price of the factory and the selling price of the foreign trade company.  It is common for the law of supply and demand to determine sales price.  The following is a great primer for pricing: 4 Methods of Supplier Pricing – A Comprehensive Overview

 

  • Profit model of the purchasing agent

The profit model of the purchasing agent is a fixed amount, a percentage of between five and 10 percent, of the order as a commission. This means any purchasing costs associated with supply and demand are removed completely from the profit model. There is no price change because a buyer’s products are selling well or not. Sourcing agents fee structures will not change. This provides a degree of transparency the other models do not offer.

Section summary: Profit model of the trading company> profit model of the manufacturer  > profit model of the purchasing agent

 

Buyer protection

Buyer protection means any product sourced from a Chinese supplier have some degree of guarantee in a variety of ways.

 

  • Buyer protection from the manufacturer

In the case of a manufacturer and buyer having a dispute on the product order, the manufacturer will protect itself and their interests.

It is rare a manufacturer will sacrifice their own interests, even in the short-term, for a buyer.

 

  • Buyer protection from the trading company

A dispute between manufacturers and buyers when it comes to a trading company depends on a variety of different reasons.  Trading companies that use Alibaba Trade Assurance do their best to protect the interests of the buyer.

It is important to note the relative position of the manufacturer and the buyer is an important fact in determining the position of the trading company.

Buyers of a high-quality and using an alternative factory mean the trading company will favor the buyer’s interests.  If the buyer is from a small company working with a well-established, long term, cooperative factory, the trading company is much more likely to favor the manufacturer’s interests.

 

  • Buyer protection from the purchasing agent

Unlike the first two, a purchasing agent seeks neutrality first. The purchasing agent has to take its reputation on the Internet and its reputation within the supply chain into account at all times. Sourcing Nova believes in keeping issues from arising at the outset. The Chinese business model is “ugly words in front.” This means all of the issues and potential negativity are addressed at the start of the business agreement.

A purchasing agent that promises 100 percent backing of the buyer is speaking marketing language to make the buyer feel more comfortable. In truth, the purchasing agent has no control over the factory.

Here is an example: A factory makes a buyers products to spec. If the buyer decides to make changes after the order is complete, the purchasing agent has no leverage in making the factory change anything or eat the costs of new production. In fact, if the purchasing agent makes trouble in this way, it can cause serious problems within the supply chain.

 

Dispute resolution options include:

There are plenty of purchasing agents who will accept bribes and buy from a manufacturer.  In the event of a dispute, there is no protection available.

Sourcing Nova has strong feelings about this and fundament prevention methods to keep it from happening.  We will discuss in detail at the end of this article.

 

Section summary: Buyer’s Protection by Purchasing Agents > Buyer’s Protection by Trading Companies > Buyer’s Protection by Manufacturers

 

Product Knowledge

You have done your due diligence in learning about your product you want to source from China, and this is important.  Each of the three suppliers has their own knowledge as well, and this can be a boon to you and your business.

 

  • Product knowledge of the manufacturer

The manufacturer are going to have the most understanding of the product characteristics, manufacturing costs and production processes of the three.  They understand how to make the products, product design, production and packaging.  If you think you have found the right factory for your Chinese products, a manufacturer will be able to field any and all questions you may have.

 

  • Product knowledge of the trading company

Trading companies glean their information from the manufacturer.  It is common for trading companies to send employees to the factory.  Here the employees learn about the production and manufacturing processes.

 

  • Product knowledge of the purchasing agent

Purchasing agents will make a factory visit but not for the same reason as the trading company.  Purchasing agents go to factories for business negotiation, audits and quality control.

Purchasing agents work with a variety of Chinese manufacturers and do not have understanding of specific product niches like professional trade companies.

 

Section summary: Manufacturer Product Knowledge > Trading Company Product Knowledge > Purchasing Agent Product Knowledge

 

Customization capability

How well a Chinese product can be customized depends on how familiar the supplier is with the specific product.

 

  • Customization capability of the manufacturer

Manufacturers see the entire product production process from the raw material to the finished product.  This means a Chinese manufacturer can provide ODM services to its customer base.

A customer can provide design drawings.  A manufacturer can make determinations on the feasibility of the product based on those drawings.

 

  • Customization capability of the trading company

The better trding companies will have professional design talent on hand who can translate the customer desires and ideas into design drawings.  The only drawback is most trading companies are only a bridge between the buyer and manufacturer.  The trading company shares the buyer’s needs to the manufacturer, and the manufacturer meets the customization needs of the buyer.

 

  • Customization capability  of the purchasing agent

The purchasing agent is very limited in their customization services –the extent of what they can do is often the external packaging. Product managers often handle customization, and this is not something most purchasing companies will have on staff. However, the purchasing agent will work with the buyer and create a Product Requirements Document. This will increase efficiency of the product design considerably.

 

Section summary: Manufacturer’s Customization Capability > Trading Company Customization Capability > Purchasing Agent Customization Capability

 

Costs and Fees

Costs and fees represent the amount the buyer will need to spend on their products.  This is different from the fees assessed as part of the sale.  This is different from the profit line of the Chinese product manufacturer.

 

  • Costs and fees of the manufacturer

Theorhetically, the cost and expense of  purchasing quality Chinese products from a manufacturer should be minimal.  This is not always the case.  Supplier pricing is not 100 percent based on production cost. Supplier Perception and Supplier Pricing Methods both affect the purchase price.

 

  • Costs and fees of the trading company

Trading companies need different ways to lower costs. This means long-term relationships with manufacturers and bulk purchases for lower costs. Trading companies may also buy from the factory in another cost saving measure.

 

  • Costs and fees of the purchasing agent

An honest purchasing agent will only charge five to 10 percent commission on the ex-factory cost. The better purchasing agents will find the optimal ratio in the supply chain by looking at the overall logistics of the order. The procurement cost savings come from this way.

 

Section summary: Trading Company Fees > Purchasing Agent Fees > Manufacturer Fees

 

Communication Efficiency

English may be the language of business in the majority of the world, but many Chinese manufacturers are traditional.  This means they speak Chinese and only Chinese.  This is not always the case.

 

  • Communication efficiency of the manufacturer

The majority of larger manufacturers no longer have a difficulty with direct communication with buyers. Rather, they would not like to work with small businesses and orders. Many small businesses will have lots of questions, requests and concepts.

Manufacturers focus their attention on product requirements of the purchase order, even if the requirements do not meet market demand. The manufacturer wants to complete the order and be paid without issue.

Basically, a manufacturer wants few questions and big orders.

 

  • Communication efficiency of the trading company

A trading company will often be more willing to communicate in a language besides Chinese than a manufacturer.  Trading companies do not have any production taking place.  Their value-added services, like communication, are the core of their daily operations.

The trading company is always following up on customer needs and will work for months to win a customer’s business.

Trading companies are aware of market trends and are knowledgeable in specific product areas.  Their experience brings many customers unexpected suggestions on their products.

 

  • Communication efficiency of the purchasing agent

Purchasing agents and trading companies are very close in communication.  They both work in the service industry.  The purchasing agent may need to spend more time learning a specific client’s niche product.

 

Section summary: Trading Company Communication Efficiency > Purchasing Agent Communication Efficiency > Manufacturer Communication Efficiency

 

Accessibility

It is nice to have your Chinese product sourcing partner available via a quick email.  This is not always the case.

 

  • Accessibility of the manufacturer

Those who are trying to source Chinese products in online business channels are not likely to find manufacturers. Manufacturers neither care about or work to maintain an Internet presence. They would rather work through traditional channels of business with procurement agents directly. The webpages are ancient looking and often have contact information and a company profile. There will be no further information available.

 

  • Accessibility of the trading company

Trading companies take Internet marketing seriously. Trading companies want buyers to find them on B2B platforms. The goal of a trading company is to take a visitor and convert them to a customer. They do not want to educate buyers as this may send them to competition with a better product.

 

  • Accessibility of the purchasing agent

Purchasing agents and companies want you to find them on the Internet. They are readily available on social media and Google searches.

Better purchasing agents will have blogs and articles on how to help customers import goods from China.They want customers to learn as much as possible for the best purchasing decisions. Sourcing Nova’s comprehensive, and growing, blog covers many of these topics in detail. For example:

  1. Focus on finding the best manufacturer for the customer and products;
  2. Compare differences in products from similar industrial clusters;
  3. Analyze and save money during the purchasing process;
  4. Share information on how not to be swindled during the purchasing process.

Purchasing agents and companies understand the international trade process, money transfers, shipping, Amazon fulfillment and share this information freely with the Internet.

There is not much information available about specific products. Some purchasing agents and companies, like Sourcing Nova, analyse China’s supply chain and industrial clusters on behalf of their customers.

 

Section summary: Sourcing Agent Accessibility > Trading Company Accessibility > Manufacturer Accessibility

 

Difficulty and Risk

Difficulty and risk refers to processes after the product purchase including transportation, tariffs and customs.

 

  • Difficulty and risk of the manufacturer

Going directly to a manufacturer is the most difficult.  The manufacturer will only take responsibility for product production and shipping in China.  Buyers are responsible for freight forwarding for customs and transportation.  The buyer also has to arrange for their own third-party inspection service.

In the case of a problem with the production process, many buyers will not be able to find adequate help.

 

  • Difficulty and risk of the trading company and purchasing agent

Trading companies and purchasing agents are equal when it comes to matters for the import and export of Chinese goods.  They both make the process smooth for the buyer.

 

Section summary: Manufacturer difficulty and risk > Trading company difficulty and risk = Purchasing agency difficulty and risk.

 

Product Sourcing Options

What are the options available to a buyer of Chinese products?  Do you want to be diverse with many options, or focus on a single product and related goods?

 

  • Product Sourcing Options of the manufacturer

A manufacturer can produce products only within their capabilities.  Anything outside of their expertise simply is not possible.  Think back to our ceramic mug example.  A manufacturer who makes ceramic mugs and nothing but will not make glass or stainless steel.

 

  • Product Sourcing Options of the trading company

Trading companies work with a variety of manufacturers.  The trading company knows the differences between the manufacturers and can choose manufacturers to make products for their customers.

Those buyers who may look to the trading company’s competition will not be able to help with product sourcing.

 

  • Product Sourcing Options of the purchasing agent

The purchasing agent can find any supplier for the buyer.  This is a great benefit for the customer.  They can compare similarities and differences of products between suppliers.  This means greater product choice.

 

Section summary: Sourcing Agent Product Sourcing Options > Trading Company Product Sourcing Options > Manufacturer Product Sourcing Options

 

Supply Chain Knowledge

The supply chain covers everything from the raw materials to the finished product.

 

  • Supply chain knowledge of the manufacturer

The manufacturer is only familiar with the supply chain of their own products.  They know their upstream raw material costs, midstream manufacturing costs and downstream finished product purchase prices and sales markets.

They are not familiar with anything else as a rule.

 

  • Supply chain knowledge of the trading company

The trading company has understanding of the purchase price and downstream sales market of similar products.  They do not see the purchasing behavior from the overall perspective of the supply chain and have no experience in the supply chain of products in other industries.

If you ask for help with unfamiliar products, there is a high possibility the trading company will not know what to tell you.

 

  • Supply chain knowledge of the purchasing agent

The purchasing agent understands supply chains better than the product.  The purchasing agent also want to keep the links in the chain at a minimum.  There is a systematic process to find the best producers in most industries.  The purchasing agent does not need a B2B platform such as Alibaba.  The purchasing agent skips the middleman entirely and works with the source factory directly.

 

Section summary: Purchasing Agent Supply Chain Knowledge > Manufacturer Supply Chain Knowledge> Trading Company Supply Chain Knowledge

 

Final thoughts

Which supplier is best for you and your products?  If you are familiar with the fine details of the product, have a large order in mind, are familiar with importing products from China, have the resources to communicate with the factory, then you can find very good manufacturers directly with no issue.

If you have several products within the same industry and have a low quantity, you are best to choose a trading company.

If you do not know what company is the best for your products in the industry or do not understand the day-to-day work with purchasing and shipping Chinese products, then you should choose to outsource the entire purchasing process to a purchasing agent.

Sourcing Nova is a sourcing service specializing in sourcing products from top manufacturers in China.  We are committed to work with the best manufacturers.  The largest manufacturers have mature corporate systems and a wise range of customer sources.  They do not pay off purchasing agents for orders, and this limits the potential of corruption.

If you are interested in providing your customers with the same level of products as the world-class brands available, then Sourcing Nova is your best partner for Chinese products.