Sourcing Disasters (and how to avoid them)

Date: March 19, 2014

Sourcing Disasters (and how to avoid them)

 There’s a National Geographic program called “Seconds from Disaster”, which takes nightmare scenarios like plane crashes and shipwrecks and walks the viewer through the steps leading to the actual disaster. Here I walk the reader through a case study illustrating how an international buyer let their sourcing project go off the rails.

Unlike the disasters which were shown in the National Geographic program, which have complex root causes that only experts can identify, the sourcing disaster I share here is very common and you will be able to spot the common pitfalls and be able to avoid falling into them.

The long story made short:

Do your due diligence/audits on potential suppliers BEFORE you send money and make sure you check the quality before the goods are shipped out.

Intro to the full story:

Would you buy a car without taking it for a test drive, even if the dealer was well known? Would you have major surgery without getting a second opinion, even if the doctor was from a prestigious hospital?

Yet for some reason far too many buyers place large orders in China without conducting proper due diligenceThey put far too much trust in online directories and fail to do even a minimal amount of due diligence and quality control.

Flying yourself to China and spending a few days at the factory is a tiny investment, especially when you weigh it against the cost of a lost deposit, quality failure or a missed delivery date. And if you don’t want to fly to China, you know that audits can be done by third parties at very affordable rates.

The story started with a purchasing manager placing an order with a factory in China that turned out to be a disaster.

Purchase Manager (PM): “I can tell you from first-hand experience the company has virtually no control over the crummy factories they contract with, as it turns out.”

Clue #1: In China if you “assume” or “hope” things will work out, you have already lost.  Only if you are “sure” something will take place do you have a reasonable chance of it happening.

Probable Mistake #1: Failure to conduct due diligence or a quality audit. I suspect the buyer took the web page and factory sales people at face value when the supplier said they were a professional and experienced company.

PM: “Even though we went to China to approve the first production sample the entire first container of our product was totally defective.”

Clue #2:If the entire container was defective, then all parts pulled from the production run would have been defective; so it is not possible that first production samples were acceptable. I suspect that the buyer THOUGHT they were looking at production samples when in reality they may have approved “golden samples” or prototypes provided by the supplier to ensure the buyer had something good in their hands before placing the order.

The so-called “initial production samples” actually matched what was being produced on the line for their particular order.

Likely Mistake #2: Lack of pre-shipment inspection as it was being loading into container for shipping, to confirm that the order was to spec.

PM: “The company admitted to the defective product but in the process forced us, under duress, to place another order (twice as large) as a condition for taking back the first order. Sadly it was not until the second container had departed and the company had received full payment that we were than informed that the second production run was also defective. This time they had purchased sub-standard parts that did not have the required finish.”

Repeat of Mistake #2 and additional Mistake #3: Failure to link inspections with payments. The golden rule of China sourcing is to pay your supplier (full or at least partial payment) AFTER inspection has been made on your order.

PM: “The seller agreed to pay us to repair the defects which entailed taking every unit apart completely to replace the bad parts. They are now attempting to coerce us once again to place another order to get the money they owe us and we are absolutely convinced any new order will be defective too.”

 “To make matters worse, while all this was going on, we had also paid the company a huge deposit for tooling our commercial version of the product. The 10 production samples they sent us in time for a major show were worthless and broken.”

Cue #3: It appears the buyer was dealing with a trading company rather than the actual manufacturer. The trading company probably has a great marketing message and price, but no actual experience and little control over the manufacturer. The blind leading the blind, resulting from Mistake #1: failure to research your suppliers and verify their ability.

PM: “When asked why the company would send garbage knowing the products were no good, the answer was “to make the deadline.”

Mistake #3: No linking of payment with inspections. Factory was incentivized to ship on time in order to get paid, rather than focusing on “shipping products TO SPEC on time”.

PM: “They owe us big money which they admit to in writing. Yet now, in their latest email, the company representative states that we never told them there were any problems until “months or years later.”

Mistake #4: Buyer should have launched legal action (at least a demand letter). Instinct tells me the supplier knows they are wrong and is throwing out every last-ditch excuse in the hope of getting the buyer to spend even more money.

PM: “Our product won an award and has been endorsed by industry pros. Ours is a great product that ended up in the hands of unethical amateurs not skilled in the manufacturing process, and went for the cheap out-of-spec materials to make more money, disregarding and interfering with our brand-building process.”

Mistake #5: By selecting the wrong partners in the first place, the buyer began a sequence of events more likely than not to end in the project’s demise.

Scenario is reminiscent of the old “guess which cup the ball is under” scam. The ‘mark’ keeps paying for round after round but never gets it right because the ball was removed from the cups when the victim wasn’t looking. In this China-sourcing case study, the buyer keeps throwing good money after bad and the supplier may well have had no plans at all to actually ship quality product.

Assuming the buyers have proper contracts and a clear payment trail to the vendor, don’t rule out legal action. There are plenty of English-speaking local lawyers based in China, and just as factory labor is lower than back home, luckily so are attorney fees. But before you engage a legal team, I would suggest the following:

a) Hire an investigation firm to find out if the company you want to sue actually has any assets lawyers can sink their teeth into.

b) DON’T let your supplier know you are preparing a case. This will most likely not scare them, but rather give them time to prepare and perhaps hide assets.

Believe it or not, China’s legal system has come a long way, and foreigners can get a fair deal in the courts assuming you have signed contracts and well-documented order details.”

Summary of the lesson:

1. If you are going to use a trading company or broker rather than going to the factory direct, make sure they have an excellent reputation and track-record of success.

2. Link payments to performance/ inspections.

3. Do multiple inspections at various key phases of production.

4. Finding the right supplier in the first place is the best way to avoid drama in the long run.


By Mike Bellamy

Mike Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center . He is also the author of, “The Essential Reference Guide to ChinaSourcing” and founder of PassageMaker Sourcing Solutions.

Select the language you would like to use:

This setting will be saved in your computer if you have cookie enabled.