Importing From China eBook

Table of Contents HOW TO USE THIS BOOK.............................................................................................................. 2  ABOUT THE AUTHOR ................................................................................................................... 3  PART ONE - .................................................................................................................................. 4  BEFORE YOU START................................................................................................................. 4  THE VALUE CHECK....................................................................................................................... 4  SPECIFICATIONS........................................................................................................................... 7  PART TWO – THE CHINADIRECT IMPORTING PROCESS .......................................... 11  OVERVIEW OF THE CHINADIRECT IMPORTING PROCESS.............................................................. 12  WEEK 1 & 2 - RESEARCH & TENDER ......................................................................................... 14  WEEK 3, 4 & 5 – SAMPLING & NEGOTIATION ............................................................................ 34  WEEK 6, 7, 8, 9 & 10 – ORDER, PRODUCTION MANAGEMENT & INSPECTION ............................ 60  WEEK 11 & 12 – DELIVERY MANAGEMENT .............................................................................. 73  PART THREE – .......................................................................................................................... 91  IN SUMMARY ............................................................................................................................ 91  IN SUMMARY ............................................................................................................................. 92  GLOSSARY ................................................................................................................................. 93  CONTACT DETAILS .................................................................................................................. 101  THANK YOU FOR READING IMPORTING FROM CHINA – HOW TO START YOUR OWN IMPORT BUSINESS WITHOUT LOSING YOUR SHIRT. ................................................................................. 102 

©2008 ChinaDirect Sourcing Services Pty Ltd

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How to Use this Book Welcome to Importing From China – How To Start Your Own Import Business Without Losing Your Shirt. In this book, you will find the breakdown of the ChinaDirect Importing Process - a well-planned system for importing from China that has evolved over many years, utilising and combining the best practices from both the East and the West. This book promises to show you how to have Chinese suppliers manufacture and deliver competitively priced, high quality products on time, and also to provide you with guidance and advice on what to do if things don’t go as they have been planned. To create the maximum value for you as the reader and importer, this book has been set out in an easy-to-follow, step-by-step format. Work through this program week by week. If you follow the instructions carefully, you can confidently expect to have your products delivered to your door within 16 weeks. Custom manufactured products may take longer. To get the most value out of this book, keep it where you work, and refer to it continually throughout the importing process. When you read a new principle, I advise that you apply it immediately, instead of waiting and putting it off, saying “I will do that soon.” The more action you take now, the more you and your company can reap the many benefits of importing from China TODAY. From myself and the team at ChinaDirect Sourcing, thank you for purchasing this book, and good luck with your importing! Enjoy the program!

Lindy Chen Managing Director, ChinaDirect Sourcing ©2008 ChinaDirect Sourcing Services Pty Ltd

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About the Author As Managing Director and Founder of ChinaDirect Sourcing, Lindy Chen is regarded as one of the world’s foremost experts on doing business with China. She was a finalist in the 2008 an 2007 Women In Business Awards. Lindy formed ChinaDirect in 2005 with the mission to assist Western companies to see China not as a threat, but as their competitive advantage. Lindy has extensive experience in business with China, including: • • • • •

15 years experience in international trade in China and Australia Lecturer, International Trade, TAFE SA Lecturer, Business Administration, The City Business College, SA Board Member, Focus Certification, Quality assurance company offering certification in ISO 9001 and ISO 14001 Bachelors in Science and Education

Lindy’s contribution to ChinaDirect and its success has been in developing a unique business model and then systemising the business. Lindy’s willingness to take risks and do things differently has had her overcome many obstacles to achieve great success. Before settling in Australia, Lindy held senior management roles in Chinese companies, and ran a successful management consultancy. With Lindy’s strategic project management skills and strong business acumen, she continues to assist many Australian companies grow through product innovation and bottom line savings.

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PART ONE BEFORE YOU START The Value Check The first step before you begin sourcing from overseas is to determine whether the cost savings of sourcing direct from the factory in China exceed the fixed costs like freight, customs, duties and your investment in professional assistance for importing. As a rule of thumb, if your order is a minimum of US$20,000 to purchase from a factory/importer/wholesaler/retailer in a Western country, it is likely to be feasible for you to purchase directly from the manufacturer in China. As part of the process of determining if Importing is for you, it is recommended that you complete a Value Check. A Value Check looks like the following:

Current Sourcing (AUD$) Item

Description

Cost/ unit $

Qty per order

Order value $

©2008 ChinaDirect Sourcing Services Pty Ltd

Tooling /moulds (if any) $

Other costs $

Total $

Freq. of purchase

Comments

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Generally, you can expect to save at least 30% to 50% on product cost by sourcing direct from the factory. But then you have to add back in oncosts such as freight, Customs, duties and your investment in an import assistance company. So you need to establish the breakeven point for the value of an order locally when it starts to become feasible to go direct to China. During the Value Check process, you need to find out what the current product cost is. Your current product cost simply provides a benchmark cost for you, so you can work out your break-even volume for buying direct from the factory in China. If your product has never been produced before, it is a good idea to get a local manufacturer to quote on your prototype, or to get an industrial designer to have a Computer Aided Design (CAD) completed, and then get a local quote from a manufacturer. This will assist greatly in getting clarification on both the product specifications, and also on the savings to be made. When you complete the Value Check, remember to calculate packaging as a separate item. A copy of the Value Check template can be downloaded free from the ChinaDirect website, www.chinadirectsourcing.com.au

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In summary, what do you need to be ready to source from China? 1. 2. 3. 4.

Identify a product you want to import. Research the market to ensure there is demand for your product. Determine how you’ll sell it out once you get it here. Find out if it’s actually feasible to source direct from China (sometimes it’s more feasible to source locally!).

If it is feasible: 5. Compile detailed specifications of your item(s). 6. Arrange the necessary funding. 7. Arrange a prototype or example of your item(s). It's generally quicker and easier to have this made locally, not in China. 8. Ensure that the timing and time frames of importing from China work for you and your business. Allow a minimum of 3 months to receive your goods from the factory in China. 9. Find out if any product standards, import licenses, permits or approvals apply. Note: For many basic products, these are not applicable.

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Specifications Know what you want… in detail When you are importing from China, it is crucial that you do your homework and prepare detailed specifications for your supplier. Quality products start with your specifications. The more information you provide to the supplier, the greater chance there is of your product being produced to your requested standard. The following are some general specifications to provide a starting point for your specifications: • • • • • • • • • • • • • • • •

Item name Alternative names - to assist the Chinese supplier’s understanding of what you want Description Material Colour Finish Dimensions: Depth x Width x Height Outside diameter (if applicable) Weight Volume capacity Joints (if applicable) Standards that apply Size chart (e.g. for clothing) Accessories Other special specifications Common/possible defects

Remember to include the specifications for packaging too, if applicable. Sometimes it helps to explain to the supplier why it is that you need the product to be produced this way. If you neglect to do this, the Chinese supplier may just assume that you are a “Crazy Westerner”, and also conclude that they have a better way of doing it. ©2008 ChinaDirect Sourcing Services Pty Ltd

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Including photos and artwork (if applicable) will significantly increase the chances of getting what you want, and are a very powerful tool to utilise when importing. The next level of specification is to give the supplier a sample of your product, but bear in mind that this is only required once you’ve selected your supplier. Information on how to select a supplier is covered in Part Three. Think in great detail, and communicate all expectations clearly with your chosen Chinese supplier. To get you started on your specifications using the ChinaDirect Importing Process, use the Specifications Form template at www.chinadirectsourcing.com.au

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Get professional advice Like any unknown area that you move into in your life, when you are first dealing with China, it can appear to be quite daunting. Just as you use accountant to do your tax, a bookkeeper to do all your books, and a lawyer to do all law-related business, you can also seek an import consultant to deal with your importing matters. Getting professional advice from an import consultant will assist you throughout the whole importing process, allowing you to have a better insight and understanding into your rights, the rights of the supplier, trade laws, and so on. One of the common questions that I have been asked by clients is about Chinese agents that will source products from China for a 5% commission (or less). On the internet, you can find agents who will source your products for a commission of around 5%. However, these agents also receive a commission from the manufacturer or supplier who supplies your products, and to cover this cost the manufacturer or trading company will build in their commission into the offer price for the goods. The result is that the commission paid by you to the agent can be anywhere from at least 12% to 100% and not 5% - you can never be 100% sure. As most agents are profit driven, they may refer your business to the supplier with the cheapest price, resulting in substandard product, or to the supplier which offers them the highest commission (which isn’t necessarily the one with the most suitable product for you!). We have prepared a special report for you in how to choose an import agent and a questionnaire for you to use when you interview them. You can find this report at www.chinadirectsourcing.com.au

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Checklist of Progress By this stage in Importing from China, you should have completed the following tasks: † Completed a Value Check † Compiled your Specifications

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PART TWO – THE CHINADIRECT IMPORTING PROCESS In this Part of Importing from China – How To Start Your Own Import Business Without Losing Your Shirt, you will find the following things:

1. An Overview of the 12 Week ChinaDirect Importing Process 2. A Detailed Break-Down of the ChinaDirect Importing Process 3. Advice, guidance & pointers throughout each step 4. Forms, Diagrams and Templates for you to follow 5. A detailed explanation of each phase

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Overview of the ChinaDirect Importing Process The following is a timeline for a relatively simple product, which can be sourced off-the-shelf, and assumes everything runs smoothly without delay. The length of the final stage will depend on where it is being shipped to.

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Week 1 & 2 1. 2. 3. 4. 5. 6.

Prepare a Request for Quote document Research potential suppliers Send Request for Quote to potential suppliers Obtain quotes and evaluate offers Qualify and shortlist appropriate suppliers Prepare necessary reports

Week 3, 4 & 5 7. 8. 9. 10. 11. 12. 13.

Research & Tender

Sampling & Negotiation

Send your samples to suppliers Arrange supplier samples to be sent to you Supplier sends samples to you Negotiate price, terms and conditions with the final supplier Arrange branding (if applicable) Draft the Purchase Order Finalize the Purchase Order with the supplier

Week 6, 7, 8, 9 & 10

Order, Production & Inspection

14. Place the Purchase Order 15. Monitor the Purchase Order progress 16. Perform final quality check Week 11 & 12 17. 18. 19. 20. 21.

Delivery Management

Organize delivery Organize Customs clearance Organize the supplier’s Quality Assurance report Organize product delivery to your door Receive products at your door successfully

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Week 1 & 2 - Research & Tender The first two weeks of the process is where all of the planning is put into practice. Like anything in business, if you fail to plan, then you plan to fail. During the Research & Tender stage, you will need to perform the following tasks: • • • • • •

Prepare Request for Quote document Research potential suppliers Send Request for Quote to potential suppliers Obtain quotes and evaluate offers Qualify and shortlist appropriate suppliers Prepare the following reports:

1. Supplier Summary report – with each supplier’s details and contact person 2. Quote Comparison report 3. Landed Cost Analysis report I will explain each of these in this Part and give you an example of what each phase looks like. When you have prepared the detailed specifications for your product/s, the next step is to prepare a Request For Quote.

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‘Request for Quote’ The Request for Quote is a very important document. Receiving quality products through the importing process starts with your specifications. Remember; the more detailed information that you provide to the supplier, the more chance there is of your product being produced to the standard that you desire. The following points need to be included in your Request for Quote document: •

Opening statement

What kind of supplier are you looking for? Writing a simple statement about this will help provide clarity for you as you begin the process. Example: “We seek a manufacturer to manufacture high quality men’s underwear.” • Item Details You need to provide as much information as you can for the product you are looking for. Example: Item: Material: Labels:

Colour:

Men’s boxer underwear Lycra One small logo, heat pressed on the front of the waistband One transfer heat pressed on the inside of the waistband at the rear 5,000 pieces black 5,000 pieces white

There have been clients of ChinaDirect who have come to me and said, “I just found this T-shirt on the market, and I just want to find a supplier to copy and produce it.” This is possible, if it’s not infringing intellectual property rights, however, it will take much longer to produce it and be more costly if you neglect to do any homework before you advance with importing. ©2008 ChinaDirect Sourcing Services Pty Ltd 15

The research you need to complete involves getting specific on what products you want to import, how much they cost in a Western country to buy wholesale, and what quantity you want to order. • Quantity In a consulting project, a client may ask, “I don’t know what quantity I need to have. I just want the Minimum Order Quantity.” In this case, some homework needs to be done before you send the request for quote to any of the suppliers that you have identified. Always advise a quantity for the initial order. Example: Quantity:

10,000 per order

Clients have also asked if they should exaggerate the quantity required to get a better price and/or deal from the supplier, as well as attracting the suppliers attention. We don’t recommend this strategy. It is better to provide a realistic estimation of what you actually want to order in your first contact with the supplier. If, when you place your order, the quantity that you want has dropped from the quantity on the initial Request for Quote, the Chinese supplier is more than likely going to lose interest in completing your order, and may become irritated. Also, it is important to remember that the quote will be priced differently according to the amount of product that you are placing an order for. Certain suppliers that you come across will only want to run large quantities, and they will find all sorts of excuses to delay your order, or even worse, not ever produce your order. This can certainly be a pitfall. In this situation, we advise clients to re-select suppliers. Another question regarding the quantity of the order is “What are the Minimum Order Quantities (MOQs)?”

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Some factories advise their Minimum Order Quantity, and for others it will depend on factors like product value, product type, tooling requirements, product dimensions (how many fit in a container), frequency of purchase etc. On your first order, you need to balance getting a reasonable size order to cover the fixed costs involved in importing, with being conservative to reduce the risks. • Size chart - clothing Chinese suppliers deal with many different countries, exporting to large markets such as Europe and the USA. Because of this diversity, ‘standard’ sizes are therefore quite different. Normally the best action to take is to actually provide a size chart to your supplier, allowing them to accurately produce what you want. Remembering to complete this step thoroughly will eliminate a lot of backand-forth style of communication in an attempt to meet your expectations. Example: Size: Small Medium Large X-Large XX-Large XXX-Large

Waist (cm) 75-80cm 85-90cm 95-100cm 105-110cm 115-120cm 125-130cm

Waist (inches) 30-32” 34-36” 38-40” 42-44” 46-48” 50-52”

• Information to provide later There is certain information which is not critical in this stage, but will need to be provided later. For example, details such as pattern and logo artwork. You will also need to provide sample pieces. Advise your supplier you will provide this information at a later stage. Example: We will provide: • Pattern • Logo artwork • Sample piece for the above (if you are selected as our chosen supplier) ©2008 ChinaDirect Sourcing Services Pty Ltd

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• Questions to ask the supplier: There may be a lot of questions you would like to ask the supplier, but in the Request for Quote letter, focus only on asking about the following points: • • • • • •

The supplier’s experience and track record in export Pricing of products and shipping The product quality Supplier’s workmanship Professionalism of the person managing project/staff Wiliness to comply with the quality standards provided by you

These are some of the basic Supplier Selection Criteria, which will be discussed in detail later in this Part. In your Request for Quote letter, you can ask questions to address the above points, but ensure that you make it very easy to answer, and, most importantly, in plain English and in simple language. In China, even though most staff in foreign trade companies and export departments understand English, the level is not sophisticated. To ensure you get good results, the best way is to keep your language simple and straight. You can ask: • • • • • • •

Has your company exported before? If so, to which country? Does your company export to your country? If so, which company have you exported to? Has your company exported this kind of product before? If so, what exactly is your export product? Do you have any suggestions regarding the packaging and transportation? If you don’t have the material we require, please recommend a material with the specification. Please send photo of your current similar product Please send a one page introduction about your company (in separate word or PDF file)

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• • •

Please send a description of your quality control system (in separate word or PDF file) Please advise your Minimum Order Quantities Please provide your best quote for FOB

• Emphasise on long term relationship In the Request for Quote, it is wisely recommended that you put great emphasis that this business relationship will be a long term relationship, and also share with the supplier what you would like to achieve. From the Chinese supplier’s point of view, your mentioning of a long term relationship in your Request of Quote letter, demonstrates you are playing their game. • Request for sample During the Request for Quote process, you can request that the supplier provide you with sample material, or a sample which shows the supplier’s workmanship. Most of the suppliers are quite happy to do this for you, but they will more often than not request you pay for the freight. Sometimes it can be quite costly for each international courier. ******

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Research Potential Suppliers Once you have drafted your Request for Quote, the next step is to research potential suppliers. There is an abundance of information that is provided on the internet that will allow you to find the supplier to produce the product you require. The following websites can be used for locating a Supplier: www.alibaba.com www.made-in-china.com www.3271.com www.yahoo.com.cn At ChinaDirect, we currently have more than 30,000 suppliers registered in our company database. However, we also search beyond our database by using, local Chinese phone directories and trade directories, and Western and Chinese search engines and websites. In this stage, Chinese language does play a very important role to find the right information. As they say: “In China, nothing is impossible but nothing is easy either”. Learning from various challenges and pitfalls paves the way toward successful sourcing. The main difficulties relate to identifying suppliers, sorting the good ones from the others and finally, ensuring that selected suppliers remain as good as they appeared to be when the initial contract was signed. The mere task of identifying suppliers is not as easy as it would seem to be. Everything changes at high speed in China; this is why supplier directories you might find often do not cover the most interesting companies. The most informative directories, online or offline, are in Chinese. Later in this chapter, we will clarify the selection process for suppliers.

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Send Request for Quote to Potential Suppliers Once you have identified several potential suppliers who can produce the products that you want and completed the Request for Quote document, it is then time to make contact with them. In any given project, we usually contact more than sixty suppliers within China, and send the Request for Quote email to them. To get the best results in your tendering process, it is best you contact a minimum of 10 suppliers to cover the range. It is wise for you to try different provinces within China, and in different categories. Chinese suppliers sometimes accidentally misplace themselves into incorrect categories, meaning the suppliers in the category may not be the ideal factory for your needs. It can become time consuming to contact this number of suppliers, however this first stage is critical for you to find and select the best supplier. The work will be well worth it in the end, create greater success for you, and reduce your set-backs. A related pit-fall is that many searches for suppliers fail because the initial sample of potential suppliers was too small. In many segments, only 5% to 15% of all existing suppliers will fully comply with Western standards. Many will have a good enough product but would fail in processes management or reliability. If you start with a small initial sample of suppliers, the chance of ending up with lower end supplier is high.

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Obtain Quotes and Evaluate Offers By this stage of the process, you will have now have received between 4 to 6 quotes from a range of suppliers, and you can start to evaluate their offers. The best way to summarize all the tenders is to prepare three reports. The first report is the Supplier Summary Report, which will give full details of the suppliers who are interested in your project, including their contact details and website. This is so you can quickly reference their website anytime and see what other products they have available for production. The template is like the following:

Supplier Summary Report Product name: No.

Factory name

Contact person

E-mail

Mobile

Tel

Fax

Address

Remark

1 2 3 4

The second report is the Quote Comparison. This is a comparative market report, which is a snapshot of the pricing in China. This is a very powerful tool because this comparison will give you substantial Chinese market knowledge. In particular, you will have a guide as to what a fair market price is. The Chinese supplier’s strategy is generally to quote low initially, and then have price increases. Having full market knowledge allows you to negotiate a fair price.

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There are usually three levels of pricing in China; 1. International price, 2. Good international price, and 3. Local price. This report gives you power, not only initially, but also for down the track when the supplier inevitably tries it on for a price increase. Suppliers can and will get online and research the type of margin that you are going to make on the product, so they not afraid to go for price increases when they are negotiating with you. With this report, you will know who else is in the market, and you can use this as leverage in any negotiations with suppliers. The template is like the following:

Quote Comparison Report Supplier Name:

ShenZhen Paper Products

Contact person

Liang

No

Product name

Qty

FOB USD/pcs

1

Small box

4000*6

0.500

2

Large box

4000*6

0.600

Jessica Amount

Total

DongGuan Printing FOB USD/pcs

12,000

0.200

14,400

0.310

26,400

Linda

Amount

FOB USD/pcs

4,800

0.100

7,440

0.143

12,240

Supplier Name:

Liaoning Group Co.,Ltd.

Yonte Co. Ltd.

Contact person

Jidan

Bryant

FOB USD/pcs

JinHua Package

Amount

2,400 3,432 5,832

Shanghai Industry Penny

No

Product name

Qty

1

Small box

4000*6

0.160

3,840

0.240

5,760

0.185

4,440

2

Large box

4000*6

0.240

5,760

0.320

7,680

0.336

8,064

Total

FOB USD/pcs

Amount

9,600

Supplier Name:

Yuyao Paper Co., Ltd.

Contact person

Kathy FOB USD/pcs

Amount

13,440 Glee Ltd

12,504

Stephen

No

Product name

Qty

1

Small box

4000*6

0.122

2,928

0.150

3,600

0.160

3,840

2

Large box

4000*6

0.186

4,464

0.185

4,440

0.230

5,520

Total

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7,392

FOB USD/pcs

Amount

Shanghai Packing

Flowery Amount

FOB USD/pcs

Amount

8,040

FOB USD/pcs

Amount

9,360

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The third report is the Landed Cost Analysis. The Landed Cost Analysis demonstrates what the product will cost you, after you have factored in all of the on-costs – such as freight, Customs, wharf charges and other relevant investment in the sourcing process. This report gives you the ability to determine your profit margins, set your prices, approach potential customers to get their interest, complete a sales forecast, and complete your budgeting for the project. In the Landed Cost Analysis, you will need to give consideration to the following variables: • • • •

The United States Dollar (USD) exchange rate Customs Duty Customs GST (Goods & Services Tax) Import Adviser Management (if applicable)

Other costs will be fixed, no matter the quantity or cost of the goods that you are ordering. Keep in mind that when you import from China, these minimum costs will be incurred, such as; • • • • • • • • • • •

Port Service Charge Terminal handling charge LOLO – Lift On Lift Off Carrier Documentation Port Security CMR Fee Sea Cargo Automation Delivery Order Customs’ Clearance Fee Cartage Fuel Levy

In the below Landed Cost Calculation, I have bundled these costs into Clearing Agent Charges.

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Landed Cost Calculation The following is a simple formula for calculating the Landed Cost. Cost of goods - Free On Board (FOB) + Freight + Insurance + Custom duty + Custom GST + Clearing agent charges + Cartage from port = Landed cost Example: Product: Blanket Cost of Goods - FOB Total Unit price FOB: USD $5 USD Rate: $0.85 $5 x 2,256pcs = USD$11,280 (AUD$13,270) Freight Box size: 30cm x 38.4cm x 10cm Weight: 3.5kg/ piece 20ft container hold: 188 packages (2,256 pieces) 20ft container China to Australia: Allow USD$1,500 (AUD$1,764) Insurance Allow $117 USD Customs Duty In this case allow 17.5% 17.5% x $13,270 = $2,322 Note: Australian Customs duty range 0% - 17.5% of Customs value of the cost of goods

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Customs GST 10% of (the Customs value of Cost of Goods + Freight + Insurances + Custom Duty) Customs GST = 10% x (13,270 + 1,764 + 117 + 2,322) 10% x $17,437 = $1,743 Clearing agent charges Range: $500 to $2,000 In this case allow AUD$1,000 Cartage from port In this case allow AUD$800 $13,270 + $1,764 + $ 117 + $2,322 + $1,743 + $1,000 + $ 800 $21,016

Cost of Goods (FOB) Freight Insurances Customs duty Customs GST Clearing agent charge Cartage from port Total Landed Cost

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Qualify & Shortlist Appropriate Suppliers Selecting a good supplier in the first place is the main key for the success of importing from China. The selection of a good supplier does not happen by luck, contrary to what many people assume. The selection of a good supplier requires a system – just like selecting a good manager or a good employee for your business. Remember that this round is only the first Shortlist process. Currently, we will are only looking at short-listing two or three suppliers from the suppliers who have just replied to your Request for Quote for your projects. More information is included in this Part on how to select and qualify suppliers.

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Supplier Selection Criteria Selecting a supplier is both a quantitative and qualitative process. A supplier should offer more than just the “parts that meet specification”. Selecting the supplier that provides the manufacturing expertise as well as an understanding of the Western standards can make your product more competitive and cost effective. Supplier Selection Criteria for a particular product or service category should be defined by you with consideration of your particular project – such as the quantity you are looking for, the quality, and also the frequency of your purchasing (i.e. are you intending to buy once, many times, and how often). The basic principle here is: if there is any risk of any problem in any area (product, logistics, process etc) it must be explicitly covered in the qualification. Western companies and Chinese companies have totally different sets of expectations. Assuming that the other knows what is expected always leads to trouble. Think that “whatever can go wrong will go wrong”, unless it is explicitly managed. The fact that data is not readily available and that Chinese companies are very protective of some type of information, does not make qualification any easier. Furthermore, one of the essential factors in a supplier’s value is the quality of its management. Recognizing dynamic and effective managers from ineffective bosses, in the Chinese context, is important in the qualification process as well. Common supplier selection criteria are: • Supplier experience and track record in exporting: The supplier’s track record is based on their previous experience and past performance with the particular product/service to be purchased. As well as a track record of their past performance, you will also be looking at their track record for business-performance improvement. • Quality and workmanship When examining the quality of the product and workmanship of the supplier’s company, you will want to ensure that there is a relative level of sophistication in the quality of the system by which the supplier operates. Make sure that the supplier meets regulatory requirements, and any mandated quality system registration. ©2008 ChinaDirect Sourcing Services Pty Ltd 28

• Capability – core competencies Check the supplier’s ability to meet the current and potential capacity requirements, and do so on the desired delivery schedule. • Service level & partnership Check the technical support availability of the Supplier, and their willingness to participate as a partner in developing and optimizing design and a long-term relationship. • Price Check on the total cost of dealing with the supplier. This includes; material cost, communication methods and inventory requirements. ****** Once you have read through and understood the essential criteria for determining the right supplier for you, review the following methods to determine how well a potential supplier fits the criteria: 1. By requesting a formal quote, which includes providing the supplier with specifications and other requirements (for example, testing). 2. Through visits to the supplier by management and/or the selection team. 3. Through confirmation of quality system status either by on-site assessment, a written survey or request for a certificate of quality system registration. 4. Through discussions with other customers served by the supplier. 5. Performing a review of databases or industry sources for the product line and supplier. 6. Through evaluation such as prototyping, lab tests, or validation testing of samples obtained from the supplier.

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Supplier Selection Procedure Ensure that you have checked all of the following boxes as you make your selection of Supplier. Selection Criteria 1. Quality/workmanship 2. Price 3. Service 4. Credibility 5. Track record, history and experience 6. Capability - core competences 7. Capacity - total resources available 8. Person managing the project 9. Honesty 10. Image

† † † † † † † † † †

If you are in doubt about any of the ten aspects on this check-list, it will be up to your own personal judgment as to whether to proceed to source your products through that supplier. Once you have completed the checklist, begin your Supplier Selection Procedure. Step 1: Elimination Process After the initial quote and research on a selection of 10 Suppliers minimum, usually the most expensive supplier can be eliminated. Suppliers with non-professional quotes and those which are trading companies should receive less consideration from you as potential suppliers. Trading companies are wholesalers with a license to export, and sometimes misrepresent themselves to be the factory. If you don’t speak Chinese, and have little experience in international trade, they can be easier to deal with, as they are generally more Western savvy than the factories.

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Step 2: Shortlist Up To Three Suppliers Visit the suppliers website to determine: • Level of professionalism • Export experience (preferably has exported to Europe, U.S or Australia) • Size of their company • History of company After your first round selection of suppliers, you need to carry out further communication to confirm your specific product requirements with each supplier. ******

Communication Diary The best way to manage your supplier is to keep a Communication Diary between yourself and the Chinese supplier. The Communication Diary looks like the following: No

Item we need or asked for

Date requested

Description

Supplier’s reply

Date replied

1 2 3

The way the communication diary works: Throughout the importing process, you will have requested several things from your supplier. From each of the things you have requested, you will have received a response to some, and no response to others. List each of the items in detail in the column, and send the list to the supplier every 2nd or 3rd day. This will allow the supplier to be on the same page as you in terms of what you have requested, and give both you and the supplier an accurate picture of what has and hasn’t been replied to, and how long it has been since that item was requested. ©2008 ChinaDirect Sourcing Services Pty Ltd

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This is a very subtle and effective communication tool with Chinese suppliers. It has helped ChinaDirect Sourcing to successfully deliver more than 100 projects and communicate with 1,000 suppliers, whilst maintaining good relationship between the importer and the supplier. It is not hard work, and will definitely reduce your stress levels! Start your record right from the start of Product Specification, and document everything you have asked for. This way, all requests will be reflected and followed in all of your communications. Note that it is too late to correct orders and specifications when the goods have already arrived at your port, and you have discovered that the product is not what you want or the quality of the product does not meet your expectation.

State to your supplier in clear terms that there will always be a consequence for them if they choose to ignore your request. Be persistent, yet polite, in your approach so the supplier knows clearly from day one what you want, what you expect, when you need it, and what will happen if they don’t deliver them on time. Over time, your suppliers will learn if they don’t follow your instructions and deliver on time, they will be followed up again and again, and possibly even penalized. Just as a mother is unable to ignore her crying baby indefinitely (for the baby simply won’t stop crying until it’s been seen to), your supplier cannot ignore your request and your instruction that apply to this system!

******

Now we have short listed 3 Suppliers, we will move to next stage of Sampling.

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Checklist of Progress By this stage in the ChinaDirect Importing Process, you should have completed the following tasks: † † † † † † † † † †

Prepared the Request for Quote document Researched potential suppliers Sent Request for Quote to the potential suppliers Obtained quotes from the potential suppliers Evaluated the offers you have received from the potential suppliers Completed a Supplier Summary Report, Quote Comparison Report, and the Landed Cost Analysis Qualified and short listed appropriate suppliers Filled out the Supplier Selection Criteria Shortlisted up to three potential suppliers Created a Communication Diary between yourself and the Supplier

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Week 3, 4 & 5 – Sampling & Negotiation By this stage of the ChinaDirect Importing Process, you now have three reports in your hand: 1. Supplier Summary – Knowing who can supply the product you want 2. Quote Comparison Report – Knowing what the fair market price for your product is 3. Landed Cost Analysis – Knowing how much it will cost you (estimated) to get the product imported into your country, as well as what margin you can achieve through your importing From the information gleaned from these three documents, you now be clear whether importing will provide a good return for your investment. If so, the next step is to send your sample or prototype to each of the shortlisted suppliers and have the suppliers make and send a sample back to you for your evaluation and final selection of your supplier.

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Sampling Overview Most importers require an exact sample from the supplier prior to placing an order for the full quantity. This is achievable; however the first samples you receive from China may not always exactly match your specification and/or sample. The Sampling Stage can be a back and forth process between you and the Chinese supplier, even when you’ve provided as many specifications as you can in the first instance. Normally we send samples from our clients to a minimum of 3 suppliers. You will need to send samples directly to the supplier and ask the supplier to send the sample back – however this will cost money. It is important to realise that sometimes the supplier will ask for your international courier account, (e.g. ‘DHL account’), and send a lot of unnecessary stuff to you, which can create high costs for you unnecessarily. Because this process can be so complicated and involves a lot of sending back and forth, it is both effective and convenient to have a China office who acts as the central point for your samples and deliveries.

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In our system, the sampling process is illustrated by the diagram below:

Client provides three samples to our Australian office. Those same three samples then sent to our China office, who then communicate directly with the shortlisted suppliers. China office sends the 3 client samples to the short listed potential suppliers, and re-confirms the quotes for production. China office collects samples from those suppliers, checks their workmanship and material, compares the samples and then shortlists a potential supplier .

When you are carrying out the Sampling process by yourself, you can utilise the same method, however it will take longer and will cost more money to do it without the support of a local presence in China. Once you have the Shortlisted Potential Suppliers you can start the process of sending a second round of Request for Quotes to your three Shortlisted Suppliers. See over the page for the sample letter of a second Request for Quote. ©2008 ChinaDirect Sourcing Services Pty Ltd

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Second ‘Request For Quote’ Email (example) Dear _______, Thank you for your detailed quotation and congratulations, you have been short listed as a possible supplier for the supply of “_______________”. We have just finalized the product specifications. These are: Material: Outside: Inside Stitch: Colour: Printing: Artwork: Dimensions: Weight: Quantity: Packing instruction: We are looking for a long-term manufacturing and supply agreement. Please: 1. Advise packing dimensions. We need to know the total cubic meters (CBM) to determine how many fit in a 20’ container 2. Give us your best quote FOB and CIF into in USD per piece for _____________, so you can be competitive. 3. Advise on the conditions of making exact sample prior to the mass production: 1. What do you need from us for making exact sample? 2. How long it will take? 3. How much it will cost? 4. How much will be the setup fee if any? 4. Give us a breakdown of cost percentages including major material cost, other materials, labour, overhead, and profit. For example: * Polyester = 20% * Recycled cotton = 7% * Other materials = 3% * Labour = 45% * Overheads = 13% * Profit = 12% After we receive the above information, we will then select the final supplier. If you’re selected, we will ask you to make an exact sample and sign the Purchase Order. If you have any questions, please contact us. Thank you! ©2008 ChinaDirect Sourcing Services Pty Ltd

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Sample Making Comparison Report After you have sent the second Request for Quote letters, you can then prepare a Sample Making Comparison report. The template for this report is as follows: Project name: SUPPLIER 1

SUPPLIER 2

SUPPLIER 3

Company/Supplier Names: Exact cost to make sample: • Tooling fee • Mould fee • Die cut • Printing set up film How much of the above cost will be refunded? Other fee(s) involved? Exact material required available now? Time to make exact sample? Comments:

By filling out the above form, you can then finalize one of the Shortlisted Suppliers to make the sample for you.

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Sample Making Now you’ve found the supplier you want to work with, you’re satisfied that they’re reputable, and you’re happy with the price of producing your order, the next step is to get a sample from that supplier If you have minimal experience dealing with the Chinese, or in international trade, the balance of power in your relationship with the supplier, will lie with them. To show that you’re serious about dealing with your Supplier, proper and thorough documentation is required to create a foundation of understanding, and minimize the inherent risks. Most suppliers that you interact with will prefer loose arrangements to supply a sample, because it minimizes their risk and liability. We recommend minimizing your risk by the use of a Sampling Agreement. The Sampling Agreement can be just one page long, and include: • • •

The agreed commitment from the supplier of a date by which they will have made the sample for you The consequences for the supplier of not producing the sample on time, and The specifications of the sample, as the sample may vary from the final mass production.

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Sample Improvements After the sample has been made by the supplier, it can then be sent to you. It is normal for it to be your responsibility to pay for the freight of the sample. Before the supplier sends the sample to you, you can request that the supplier take detailed photos of the finished sample ahead of time, so that you know in advance what you are receiving. In the Sampling Stage, you may want an exact sample from the supplier prior to placing any orders. This is achievable; however remember that the first samples you receive from China may not always exactly match your specification and/or sample. Also remember, the Sampling Stage can be a back and forth process between you and the Chinese supplier, even when you’ve provided as many specifications as you can in the first instance. From the photo’s you have received, if you see any improvements required, the best way is to list all of them on the following Sample Improvement Requirements Form. Using this format is the most efficient way of communication with the Chinese supplier to receive an accurate sample.

Sample Improvement Requirements Item

Current sample

Picture File name

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Requirements Factory answer

Defects Category

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Example:

Orthotics (Shoe Insole) Sample Requirements Item Orthotics logo

Current sample Orthotics logo is very blurry

Picture File name

Requirements The logo should be clear, as the new sample sent

Factory answer

Defects Category Minor defect

Colour consistency on bottom side Side

Discolour on the bottom side



The bottom should be even colour

Major defect

Side splitting or cut

The side shall be no split at all.

Major defect

Colour on hard Orthotics Edge trim

The colour is light blue

&

The hard Orthotics shall be the dark blue we provided. The edge shall be trimmed smoothly.

Major defect

It shall be cleaned properly; final products shall be cleaned by damp cloth. The pattern on the Orthotics shall be complete. The size statement shall be the same, with “XXS” on both side

Minor defect

There should be only one size logo needed on this side

Major defect

Dirt on the orthotics

Incomplete patterning Size statement

Size statement

Some edge is not smoothly trimmed There are dirt on the orthotics

The pattern on the orthotics is not completed. Size statement is not consistent, while “XXS” on one side and “K” on the bottom Double size logo





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Minor defect

Minor defect

Major defect

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Purchase Order Negotiation By this stage of the importing process, you have selected one supplier, you are satisfied they are reputable, you are happy with the price of the product, and the sample you received was up to standard. The next step in the process is to draw up and negotiate the Purchase Order (PO) with the selected supplier. The Purchase Order will need to include clauses covering the following areas: • • • • • •

Quality control procedures Terms of payment Moulds ownership Packaging requirements Penalties for quality issues and delivery delays Any other additional clauses defined by individual project

The ChinaDirect Sourcing Services Purchase Order is a tried and proven document to get the correct product delivered to the correct location at the correct time. If you wish to arrange a Purchase Order through ChinaDirect Sourcing, contact us at [email protected]

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Key Points for Negotiation Before defining and explaining the information and clauses that you will need to cover when preparing your Purchase Order (PO), it is important that you have an understanding of the negotiation process. Let’s go through some of the key points for negotiation. 1) Format It is always good practise drafting the Purchase Order from your side then send it to the Chinese supplier for negotiation and finalisation. Most Chinese suppliers have their own Purchase Order format, which can be too basic for the proper formal agreement you will require. More often than not, it does not protect your interests. Some of the suppliers utilise a simple, one-page, standard international proforma invoice, and some suppliers use a standard Chinese domestic Supply & Purchase agreement. If you construct your Purchase Order based on theirs, it is going to create unnecessary hard work for you in the PO negotiation process. It is most beneficial that you do most of the work for the Purchase Order yourself, and have everything prepared for negotiation. If by chance your supplier asks you to use their format, you can say to them: “This Purchase Order is from our lawyer, and I can’t change the format.” At ChinaDirect, we do not recommend you agree to use the Chinese supplier’s version of the Purchase Order. By investing the necessary time to prepare the document, you will minimize your risk in the importing process. 2) Language In a Purchase Order there will often be some sentences that are difficult for the Chinese suppliers to understand. Sometimes the Chinese supplier may ask you to provide them with the Chinese version of the PO. It is best that you provide a Chinese version as the English speaking person that deals with you may not always be the person who can authorize the acceptance of a PO, and the boss may not speak English. To make his/her job easier, it is well advised that you send a Chinese version. ©2008 ChinaDirect Sourcing Services Pty Ltd

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One way to obtain a Chinese version of the PO is to contact ChinaDirect Sourcing. If you are unable to do this, you can still explain and send the PO document to the supplier in English, making absolutely sure that the document is explained in plain English. 3) Basic information on the Purchase Order a. Vendor’s details Include all of the details of the vendor on your PO, such as: Name: Telephone: Fax: Contact person: Date: Delivery Date: Delivery To: Also include detailed information about the Product; -

Description; Quantity; FOB Unit price (USD) FOB Amount (USD) Total

In the PO, you can give a detailed description on separated pages such as Appendix A, B, C etc. b. Purchaser’s details: Include all of the purchaser’s details on the PO, such as: Name: Telephone: Fax: Contact Person: Date:

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c. Marks & Numbering Include the specific instructions to the Supplier on how you want them to package and pack the products, and what text you want them to include on the outer carton or box. d. Other Instructions The following photos need to be provided at completion of each stage, prior to the balance of payment being made: 1.

A photo of each individual finished product type

2.

A photo of specific packing

3.

A photo of goods loaded on a pallet

4.

A photo of loading to container. e. Product Completion Date – to be filled in by the Vendor

The product completion date section of the PO should be clearly specified in the PO document, and agreed upon by both parties – the importer and the supplier. f. Inspection It’s at this stage you need to decide whether an on-site inspection of the goods will be conducted or not. There are three basic options you can elect when it comes to Product Inspection. They are: 1) Inspection by third-party 2) Inspection conducted by yourself 3) No inspection conducted If electing to do an on-site inspection, I suggest you elect Option 1 when importing your goods from China. Please refer to the section on Product Inspection for full explanations and an understanding of the importance of Product Inspection, before making ©2008 ChinaDirect Sourcing Services Pty Ltd

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your decision on the inspection of your goods. It is essential that you complete this. Informing the supplier of your exact standards at this stage reduces the risk of unfulfilled expectations, or price increases because of newly introduced standards after the deal has been negotiated. All travelling, transportation and other expenses incurred will be on the vendor’s account if inspection after confirmation by the vendor is not possible. ****** Above is a list of the basic information which is included on the Purchase Order. This information will constitute the cover page of the PO only, with the key points, and the rest of the Terms & Conditions to follow.

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The Terms & Conditions of Purchase Order It is essential that the following aspects be included in the Terms & Conditions of the PO. •

Delivery time:

Delivery time can be discussed and agreed upon with the supplier. It will involve what responsibility the supplier will take if the delivery is late. ChinaDirect use a sentence like the following: “In case of non-delivery within the contracted time for shipment, the Vendor agrees to be held responsible for any consequences arising there from.” This can sound vague, however it will set the tone for the delivery, and the supplier will understand that you are serious about receiving your order on time and in appropriate quality. •

Requirement fulfilled:

It is essential that you have the suppler fulfil each one of the requirements that you request in your PO, such as the description, quality, quantity and other necessary conditions. These requirements shall be listed in detail and repeated over and over for strict emphasis. Regardless of whether you have discussed these details with the supplier at an earlier date (or not) via correspondence, it is good practice to list everything down again in document form. In China, details and requirements written in contract form are more likely to be enforced and have a better chance of being actualised. If you are going to conduct inspections, or have a third party conduct an inspection for you, you can also mention that any inspection of the goods prior to shipment shall not constitute a waiver of any condition or an admission that any condition has been fulfilled. This is necessary, as inspection is random checking, and no one can check the goods one by one if you are going to order 200,000 pieces of, for example, an ice cream cup, or even 10 pieces of complex machinery. ©2008 ChinaDirect Sourcing Services Pty Ltd

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Some Chinese suppliers may not agree with you in this clause, however when you raise the issue, it is a good discussion point. Remember that negotiation in Terms & Conditions shall not be regarded as a single activity, but a rather important process of educating suppliers in performing to your expectations. Therefore, allow some time and patience to go through finer details with your selected supplier. •

Quality Requirement:

It is regarded good practice to ask the supplier to supply the product in accordance with your requirements for quality. Not only that, you should also state within your PO, what will happen if the supplier does not follow this requirement, and fails to provide a good quality product. You need to give the standard requirements to the supplier, and state how you will define the inferior quality and/or breaches of the contract, and what evidence you will provide to the Vendor for them to accept the claim. You also need to state who will take care of the expense of return and re-shipment of the defective and repaired merchandise, if applicable. These requirements may sound harsh, however in our experience, it is better to be prepared beforehand rather than be caught out down the track. Discuss all of this with the supplier before you sign the PO and pay any deposit, and make sure you are managing the supplier and not letting the supplier manage you. You are the active manager in the relationship, rather than a passive importer. •

Improvement Requirement:

If you are dealing with the supplier for long term relationship, and the goods are machinery or involved with new technology that is to be updated continually, you can ask the supplier to make sure that the goods supplied under the Purchase Order are new, unused, of the most recent or current models, and incorporate all recent improvements in design and materials, unless provided otherwise in the contract. If the goods are machinery and concerning some design, you can ask the supplier to make sure that the goods supplied under this contract shall have no defect arising from design, materials or workmanship or from any act or omission of the vendor that may develop under normal use of the ©2008 ChinaDirect Sourcing Services Pty Ltd

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supplied goods in the expected operating conditions in the end-user’s country. •

Trademark & Copyright

You may find that sometimes the suppliers you import from are also supplying some similar product lines to other countries. The supplier may have copied from other machines or products they have seen elsewhere, and they want to sell it to you. You need to make sure that the product you have purchased is not subject to registration or established usage under trademark, copyright, design, and license or business name. In order to determine whether the product you are purchasing falls under any copyright, patent, trademark or licensing, it is best to use your common sense. Ask your supplier to document in writing as part of the Purchase Order that they understand that the product is not subject to intellectual property rights breaches, and that they will be responsible for all penalties, if this is the case. •

Standard Requirement:

It is good practice to ask the supplier to take full responsibility that the merchandise supplied conforms to the safety and health regulations of the importing country. If the supplier has exported to your country previously, they should know this already; if they don’t, then it is best for you to simplify it for them and make a list, allowing them to easily understand. For some products, it is particularly important, and in fact critical, to make sure that the standard requirements are met, otherwise you may not be allowed to sell your product once it has been imported into your country. For the standard requirements, each product is different. For instance for ice cream cups being imported to Australia - Australian food and health safety standards will apply. For machinery, the Australian safety standards will apply. For chemical products, the Duties Of Manufacturers, Suppliers, Importers And Installers For Dangerous Goods will be outlined in the Australian Dangerous Goods code.

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•

Freight measurement:

When outlining freight measurement in the Purchase Order, it is considered good practice to provide detailed dimensions to calculate the freight. At ChinaDirect we ask the supplier to pay any additional freight charges incurred due to in-exact freight measurements supplied by them. This can be very effective as it makes the supplier responsible for the work they do, and also for the information they have provided. •

Force of nature:

Always discuss with the supplier what will happen in the event of unseen force of nature, strike, riot, civil commotion, war, epidemic, quota, embargo, interruption or congestion of transportation, inability to obtain shipping space, or other causes or circumstances beyond your control, which interfere with the completion of the contract. Make sure you don’t have to pay the supplier any damages or compensations in these events. You shall also have the right to postpone the shipment. •

Marks:

If you are a wholesaler, you more commonly than not, don’t want your customer to know where you import your goods from. When you arrange the Purchase Order, ask the supplier not to put on your goods or packaging their name, address or other marks of the supplier and/or any other information that is disadvantageous to your interest on the goods, inner box, export package, or any packaging. If a manual for the product is required, you will need to provide a version in English if the supplier doesn’t already have one. Also ask the supplier to put any signage on the goods, inner box, export package, and any packaging in English only, or, alternatively, packed with the label that you have provided. •

Disputes and Differences:

Whilst using the ChinaDirect Importing Process reduces the chance of disputes arising between the supplier and the importer, you still need to advise where the case will be held - your country or in China. In China’s commercial law system, arbitration is the most common legal path, with no direct arbitration between the supplier and the importer, ©2008 ChinaDirect Sourcing Services Pty Ltd

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rather the Chinese supplier will send the dispute straight to the government body. •

Currency and price change:

The US Dollar versus Chinese currency fluctuates a lot. In ChinaDirect’s PO, the currency is written in words such as: “The goods to be purchased at USD currency on the FOB delivery to the port in Shenzen.” We also request that the supplier confirms the price is fixed and firm for a minimum of 12 months, and is free from any exchange rate variations. Request that you need to agree upon any price increase of no more than 3% after 2 years. This may not always work with the supplier, however it sets the tone and is a good point to start. In negotiation, the key point is to anticipate what may happen. If you understand most of the situation at hand, and get to know the supplier’s habitual way of thinking, you have already won half of the game. It is common practice for Chinese suppliers to quote low initially, and then increase the quote upon receiving a sample and specific quality expectations. In the first order they will provide you with a good price. In the second order, they may raise the price 20% to 30% if you are not skilled in the process of importing. It is very important at this point in time to set the tone and gain a full understanding of each other’s position. Then by the second order, you will be in a much better position to negotiate, even if the supplier may still want to increase the price.

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Example Recently a supplier asked to increase the price from $2.16 to $2.96 per piece, and gave the following reasons: a. b. c. d.

The decrease of refunded tax percentage from the Chinese Government The rise of RMB exchange rate The increase in labour cost The mistake from the calculation of needed fabric/material

I used the following points to negotiate: • •

•

I requested they use the percentage increase instead of the dollar amount as I thought the increase was too deep. I asked for a break-down of their costs, in itemized format. I told the supplier that I am just the person in between, and let them know that the client may not be happy to place an order like that.

The outcome of the negotiation was a price increase of only 11%, instead of the original 37% increase.

•

Payment terms

It is common practice to pay a 30% to 50% deposit to the supplier upon the signing of the Purchase Order contract. However, in some cases you can discuss with the supplier that you will pay a deposit as little as 10%, once you have established a good relationship with your supplier. This is especially relevant if you are going to have a long-term relationship with your supplier and if it is a large amount of money. The remaining balance of the payment is usually made after the presentation of the copy of the Bill of Lading (this Bill will be defined under Week 11 & 12). The payment method usually will be Telegraphic Transfer or by Letter of Credit, also explained later. •

Moulds Ownership

It is important you discuss with the supplier about the moulds required for the production of your products. If you have paid for the moulds and the equipment, those moulds and equipment shall remain your property. You ©2008 ChinaDirect Sourcing Services Pty Ltd 52

have the right to ask for the moulds and equipment to be returned or sent within seven days to the nominated address with freight to be paid by you. You can also put a restriction on the supplier using the moulds and equipment paid for by you for any other reason other than for your instruction. For this clause, you can use a practical way to penalize the supplier. Be sure to include a detailed list of the moulds and equipment in an Appendix of the Purchase Order. •

Outstanding claims

This is especially relevant for long-term relationships. You can state within your Purchase Order that you will withhold payment for subsequent orders on any shipments made not to your satisfaction. •

Perfect sample before or out of production

In the case that you are not going to inspect the product yourself or have a third party to inspect the product on your behalf, it is better to ask the supplier for an exact sample of each model/size for final approval prior to production. These samples of finished products will usually be sent by air-freight, and you will be responsible freight costs. You can start by asking the supplier to pay for the air-freight, and use this as a negotiation point. In this section, you must also state when the sample shall be sent, such as: “No later than 15 days from the signing of the Purchase Order", and you shall also state that once the sample has been approved, future production shall match the approved sample. •

Penalty for late delivery

ChinaDirect always advises the supplier the implications a late delivery will have on our client. This can be things such as; o The client has already done a marketing campaign and it will cost a lot of money for the client if they receive the goods late.

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We include a practical penalty for the delay per day from the due date for delivery of the sample and of the final products. If the delay is caused by you, then these penalties cannot be applied. •

Requirement for packing

Australian Customs has very strict requirements for packing. If the goods contain any straw, cereal, rice hulls, and any other unprocessed plant materials, even if the packaging includes any timber crates, pallets or skids, the goods and container will go through quarantine – this can cost money and cause some delay on the delivery due to Customs. I always remind the suppliers that under no circumstance should they use any straw packing, and preferably no timber packing either, in the container. If timber packing has to be used for packaging since there are no other options available, ask the supplier to provide the Fumigation Certificate as fumigation in China is much cheaper than quarantining service charges in a Western country. •

Your Intellectual Property (IP) protection

In this clause, you can remind them that no information regarding this particular product shall be revealed in any of the supplier’s websites, leaflets, advertising material and promotional activities, including showing prospects and third parties, examples of the work – if the product is very unique and contains your IP. There are many ways to reduce the chance of Intellectual Property infringement. The appropriate tactics will depend on your objectives. China’s Intellectual Property laws are similar to the laws governing copyright, trademark and patents in Western countries. China’s entry to the World Trade Organisation has resulted in very positive developments on the legislative front, and enforcement of IP rights is catching up. Before the Purchase Order is complete, you can have the supplier sign a Non-Disclosure Agreement. To arrange a template of the Non Disclosure Agreement in English and Chinese, email [email protected] ©2008 ChinaDirect Sourcing Services Pty Ltd

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Summary of Purchase Order In summary, the Purchase Order shall cover most of the points mentioned above. Most suppliers prefer loose arrangements to supply the product because it minimizes their risk and liability. ChinaDirect recommend that you minimize your risk as the importer by utilising a properly written Purchase Order. The Purchase Order only needs to be two or three pages in length, but will include a commitment from supplier for all above mentioned points, and specify what will happen if any of these commitments are not met. By utilising the information provided above, you can draft your Purchase Order. Having an established Purchase Order document creates efficient and effective production and importing processes. As mentioned earlier in this section, you can arrange a Purchase Order in English and Chinese from ChinaDirect by contacting us at [email protected] Once the negotiation of a Purchase Order is done, a letter to the supplier will be sent along with the Purchase Order document to be filled out. The sample letter is as follows:

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Instruction to Supplier – Fill in PO Dear Supplier, Congratulations! You have been selected as our supplier for this project. I know we have come a long way already, but this is just the beginning of a long term and prosperous business relationship together. Please print this page and the attached Purchase Order, and use the checklist below to ensure the attached Purchase Order has been completed correctly so we can make a deposit to you as soon as possible. PURCHASE ORDER COMPLETION CHECKLIST Action Completed? Page 1 Vendor: Confirm the following: - Company name - Address - Contact person - Phone number - Mobile phone number - Fax number - Email Delivery date: Confirm delivery date on Page 1 Product: Confirm the product name Product description: Confirm the full description of the product Packing description: Give full description about the packing Page 4 Bank details: Fill in the following: Beneficiary Bank address Bank name Bank account SWIFT Final Actions Read and be clear on the terms and conditions (any questions, please call) Print the Purchase Order Sign and chop with company chop on each and every page (total 3 pages) Scan and email each and every page to total 3 pages) at ©2008 ChinaDirect Sourcing Services Pty Ltd

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The format of the Purchase Order is the standard format used with many suppliers around the world. However to help you understand the PO, we have translated it into Chinese. Please see the template document attached. If you have any other questions regarding the Purchase Order, please contact our office at: This is only our first trial order. Once we are happy with everything, we will place regular orders. I hope this is a smooth process, and a good start to our long-term relationship. Regards,

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Deposit Payment As soon as both you and the supplier have signed the Purchase Order, it is now time to pay your deposit. The total percentage that you will pay of the total amount to the supplier as a deposit needs to be outlined in your Purchase Order document. There are a number of ways you can make your international payment. Two of the most common are: 1) Telegraphic Transfer (T/T) 2) Letter of Credit (L/C) Normally, if the payment amount is under US$50,000 ChinaDirect will usually prefer to pay the supplier by Telegraphic Transfer. Remember to always keep the receipt of the payment and send the supplier the bank slip. After the deposit has been paid, you need to send a letter to the supplier, to confirm the following things: • • •

Confirmation that the deposit has been paid The amount of the deposit, and Proof of payment (receipt) HOT TIP

Remember here, during the deposit stage, that it is very important to show your supplier you are a person with integrity. When you say you will make a payment at a certain time, make sure you follow through with it, and show the supplier with the bank slip. Even if the supplier does not receive the money for another week, as an international payment takes time, this will establish their trust in you, and further develop your relationship. Because, in deposit payment, you demonstrated your sincerity by showing them the bank slip, the supplier will then trust you in the payment of the full balance.

When the deposit payment has been made by you to the supplier, the production process begins.

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Checklist of Progress By this stage in the ChinaDirect Importing Process, you should have completed the following tasks: † Gained an understanding of the Sampling Process † Understood the complexities involved in Sample Making † Sent a 2nd round of Request for Quote letters to your three shortlisted suppliers † Created a Sample Making Comparison Report † Created and sent a Sample Making Agreement to your three shortlisted suppliers † Received samples of your product from the three shortlisted suppliers † Selected one supplier † Filled out the Sample Improvement Requirement Form (if applicable) † Understood the key points of negotiation with your supplier † Completed a final draft of Purchase Order † Had the supplier fill out and sign the Purchase Order † Made your deposit payment to the supplier

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Week 6, 7, 8, 9 & 10 – Order, Production Management & Inspection The next step in the ChinaDirect Importing Process is for you to control the quality of your goods, manage the production, and decide whether you will be performing an inspection on the products or not. Quality control is absolutely imperative – it is the key in making sure that your supplier really delivers what they promised to deliver. And an on-site inspection is one of the steps in the process of quality control. China’s supplier base is improving year after year. Still, it is safer to assume that “You get what you INSPECT, not what you EXPECT”. Supplier management must be an active and hands-on activity in China. Many suppliers have not institutionalized the processes and attitudes that make a company fully reliable. You need to assume the worst and may need to perform regular inspections and supplier audits. When such pressure lessens, quality of the product or service tends to start slowly degrading. The minimum goal of such quality assurance and control is to prevent any sub-standard good from leaving China. Once the defective or wrong product has left China, it becomes significantly more difficult to solve problems. At ChinaDirect, quality control is not just a last minute process – it begins right from the start. Ensure that you make it known to the supplier that you will inspect the goods prior to shipment. Quality Control is a step-by-step process, an education process, and a process to create a partnership with your supplier. You tell the supplier what you want, explain to them which criteria you are going to utilise to check them, and have the supplier complete the checks against the criteria. We will now address and explain the Production Management and Product Inspection of the ChinaDirect Importing Process.

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Production Management There are several strategies which you can utilize when it comes to managing the supplier and the production process to make your order run smoothly order placement through to the end result of receiving your goods. Once you have signed the Purchase Order between yourself and your supplier, it would be fair to assume that you will have your products delivered to you on time, and meeting the level of quality that you specified in the PO. However, it is not always the case. It is naïve just to assume your PO will run on autopilot. If I was running a manufacturing business and never took time to look after the most important machine on the factory floor, then I’d be asking for problems to arise within in my business. This is also the case with your Chinese supplier. Chinese suppliers require constant attention and management in order to have them meet your expectations. Without ever checking (but just assuming) that things are running as they should, early warning signs go unheeded and only once there’s complete breakdown (when it’s usually far too late) is urgent action taken. Just because the manufacturer supplied correctly the first time (with the sample/s), it doesn’t mean that they will do it correctly and to standard the second and third times – especially in international trade, where there can be many complications. Compounding on all the previous challenges comes the “China factor”. Things do not get done the same way in China as they do in Western countries, affecting every stage in the process - the way to negotiate, the way to supervise, the way to solve problems when they appear, and also the way to get relevant information are quite unfamiliar to Western business people. Lots of problems that have arisen with your supplier can be solved very fast when action is taken at the right moment and at the right level. But the geographical and cultural distance between China and the West makes it hard to catch early warning signs and to swiftly react and resolve the problem. ©2008 ChinaDirect Sourcing Services Pty Ltd 61

To effectively and sustainably source from China it’s recommended to use a trusted Chinese team on the ground. Whether it is an in-house team or a trusted service organization that represents you, this is a must. For example, it is not uncommon when re-ordering, for the supplier to increase the price dramatically, taking considerable time to negotiate. When re-ordering, make sure that you reconfirm all details of the supply arrangement, including the price. You will need to establish all of the critical dates with your supplier, such as the product completion, delivery and inspection dates; so that you may ensure that the whole transaction can be carried out effectively and efficiently.

Prior Production Sample You need to establish with your supplier what the date will be for the PP Sample (Perfect Sample Prior Production) completion after the deposit payment has been made to the supplier. The PP sample completion date is the date by which you have received the final sample from the supplier that matches all of your necessary requirements and the standard of quality you have specified.

Product Completion Date The Product Completion Date, in particular, should be emphasized, and you need to tell the supplier when you will have the Freight Forwarder contact them regarding the delivery of the goods. Usually you will have the Freight Forwarder contact the supplier between 7-10 days before the Product Completion Date.

Photos Another strategy you can implement to ensure that all standards and deadlines are met for your production is to ask the supplier to provide you with photo’s at every stage throughout the production process. You can ask the supplier to email the following photos at an appropriate time to you, so you can check on and be up to date with the process and progress of your order: ©2008 ChinaDirect Sourcing Services Pty Ltd 62

• • •

Each individual finished product type Packaging of the product Product being loaded onto pallets

Product Progress Report Ask your supplier to send you a Product Progress Report every two weeks throughout the production process. You can draft the report into a basic format for the supplier to fill out. This way, you’re always in control, and ensure you receive the information you want. When all of this is completed, you can then schedule a regular time to check the progress with the supplier. You can find a template for the Product Progress Report over the page.

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Product Progress Report Dear , How is the production going? What % of the total product have you finished so far? Can you please confirm that your Final Delivery Date (FDD) remains ___ And when will you be ready for shipping? Please send a photo of the product in production to us. Please keep me informed about the progress of the project. Thanks and regards, Outer carton making Sample of outer cartons: Main Markings: BUSINESS NAME: GENDER: SIZE: COLOUR: MADE IN CHINA Side Markings: QTY PER CARTON: X PCS G.W.: X KGS N.W.: X KGS MEAS: XX CM

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Product Inspection Product Inspection is a very important step in the ChinaDirect Importing Process. The decision to inspect your products or not can significantly affect the results you achieve through importing from China. The purpose of Product Inspection is to ensure that the supplier’s consignment complies with the contractual requirements. When product safety is involved, the inspection must be conducted with the aid of measuring instruments or testing equipment. There are three main types of on-site inspection: I.

Factory Audit

During this type of inspection, the inspector/s may: a) Verify the factory existence b) Check the core production competencies and capacity claims c) Check the bona-fides of the representatives you’ve been dealing with d) See first-hand the quality procedures employed The Factory Audit report may include a Factory profile, Factory organisation, Production equipment and capacity, Quality assurance system, Technical standard, R&D, Supplier management, Hygiene, Environment, Security and Social accountability. II.

During Production Inspection (DPI)

During DPI a selective inspection of products occurs at different stages of the production line, focusing on the following aspects: a) Checking the sample for any defects or deviation from quality parameters b) Find the root causes of production defects c) Suggest practical and effective ways in which these can be rectified d) Inspect and detect poor quality linkages at different production stations ©2008 ChinaDirect Sourcing Services Pty Ltd

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e) Indentify supplier production weaknesses in the product system that lead to defects f) Product and component quality inspection before assembly g) Issue an In-Line Inspection Report complete with digital pictures h) Issue a Corrective Action Report complete with digital pictures i) Verify the execution of the Corrective Action Report (CAR) III.

Pre-Shipment Inspection (PSI) This form of inspection occurs when the merchandise is completed, packed and ready for shipment, or at least 80% of the products are packed. Pre-Shipment Inspection is performed to an agreed ‘Acceptable Quality Level’ (AQL) established between you and the supplier. AQL is defined in Single Sampling Plan and also in the Glossary. At inspection time, inspectors check the available quantity, and then take samples based on the internationally recognized statistical random-sampling technique, commonly known as ANSI/ASQC Z1.4, BS 6001-1, and ISO 2859-1. Inspector/s will verify the quantity, style, color, workmanship, size, packing and shipping mark of the products - all with a view to ensure that the merchandise meets the contract specifications, or conforms to the approved sample. If the importer is going to perform an on-site Pre-shipment Inspection, the supplier needs to submit to you a detailed Packing List (explained in Week 6, 7, 8, 9 &10) five days prior to production completion date to arrange for your or independent surveyors inspection of the merchandise. ******

PSI reports are the most essential form of inspection when importing from China. For Product Inspection via a PSI, there are the following three options:

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Option 1 Complete a PSI via a third party. During this inspection, the Inspectors will enter onto the supplier’s site and complete a Final Inspection Report. The Final Inspection Report is completed according to an AQL (Acceptable Quality Level) agreed between you and the supplier. Option 2 The second option is to perform the PSI personally. In this inspection, you will personally enter onto the supplier’s site and complete a Final Inspection Report. The Final Inspection Report is completed according to an AQL (Acceptable Quality Level) agreed between you and the supplier. Option 3 The third option is not to conduct an on-site inspection. In the case you elect this as your option, you will have to rely on the supplier to meet the standards and fulfill your requirements with your products. I’ve provided a Quality Assurance Checklist which you can have your supplier complete, on the next page. ******

Inspect or Not? Some factors to consider when deciding whether to undertake an on-site inspection or not include: • • • •

The value of the order The safety criticalness of the goods Your level of trust in your supplier Your own personal preference

Regardless of which option you take with regards to the inspection of your goods, we strongly recommend you complete a Quality Assurance Checklist with your supplier to help minimize your risks involved in importing. The Quality Assurance Checklist can be found over the page. ©2008 ChinaDirect Sourcing Services Pty Ltd

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Quality Assurance Checklist Below, we have provided a template of the Quality Assurance Checklist. This form is designed to be filled out and sent to your Supplier during the Purchase Order negotiation, and will become a part of your Purchase Order document. No.

Aspects

Test Criteria

1

Product Appearance

Does the product conform with respect to • shape, • appearance, • style and • colour?

2

Performance

Does the item function as required, and does it meet other rudimentary tests as requested by buyer?

3

Workmanship

Does it correspond with the sample supplied and were the numbers of detected defective samples within AQL acceptable limits?

4

Assembly

• •

5

Accessories

6

Material

7

Colours

8

Size and Measurements

Results

Comments

Are the components of the item well assembled without loose, missing or damaged parts? Does the product function properly after repeated manipulation? Are all the accessories included and do they match the sample description?

•

Whether the material is the same as the reference sample description. • How does it hand touch and feel compared with the sample? Do they match the reference sample and are the colours uniform throughout the sample selection? Does this comply with the reference sample?

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No.

Aspects

Test Criteria

9

Weight

Where applicable is this consistent with the reference sample and the quantity?

10

Assortment

Where goods need to be packaged in assortment, compliance with this is checked.

11

Quantity Status

Does the quantity conform to your request (PO)?

12

Shipping Marks:

Do these conform to your request (photos to be provided)?

13

Carton Status

Are they packed and sealed appropriately and fit for transport (dry, clean and stored correctly)?

14

Packing and Marking

Does this conform with your request; including packing method, packing material, barcode, printing and so on?

15

Factory Warehouse

16

Container inspection

An on-site inspection and factory photos will be taken and provided; and Is the container in good condition, dry, clean and in a suitable condition to undergo the voyage?

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Results

Comments

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Product Rejection, Rework and Re-Inspection The product is rejected when its quality level, as determined by the random sampling, does not comply to the contractual requirements. Product rejection may result in a delayed shipment or you cancelling the order. In the case that the product is rejected or re-worked for re-inspection and this therefore causes a delay in the shipment, you can refer back to the Purchase Order for clarification of this penalty. In the PO, you will have clearly specified the penalty clause for delayed shipment. In exporting, a rejection normally applies to the entire lot. Most often, the vendor has to sort the acceptable from the unacceptable in a lot and rework the unacceptable, and then submit the lot for a re-inspection. In the case of a rejection, the importer may conduct 100% inspection of the lot, sort the acceptable from the unacceptable, then ship the acceptable only and return the unacceptable. In practice, however, this approach may not happen due to the restrictions stipulated in the Letter of Credit (L/C), for example, when the partial shipment is prohibited or when the L/C stipulates the quantity in terms of a stated number of packing units or individual items. Not all products can be sorted to separate the acceptable from the unacceptable. Whether the whole lot or only the unacceptable is reworked, the vendor's resubmission of the lot is subject to examination in the same manner as a homogeneous lot being submitted earlier. The criteria during the re-inspection are more often than not, stricter than in the previous inspection where faults and/or defects were discovered. Under certain circumstances, such as the expiration of the Letter of Credit or export (or import) license and the short market supply in the product, sometimes a concession to accept the lot has to be made despite the fact that the lot did not meet the Acceptable Quality Level. The decision to reject or accept the products, given their defects and/or failure to meet the AQL, has to be made by you, the importer. And you may use this to negotiate a discount on the products with the supplier.

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Unauthorized Product Substitution The delivery of goods can be from the vendor's premises directly to Customs or to the trader's premises first and then to Customs, depending on the arrangement between you and the vendor. In either case, most product inspections are conducted at the vendor's premises. In the FCL (Full Container Load) shipment, it is a common practice that the loading or stuffing of a container after the inspection of goods is left completely to the vendor. A fraudulent act carried out by unreliable vendors is termed Unauthorized Product Substitution. For example, after the lot has been inspected and accepted for shipment, the supplier may arrange for part of the lot to be substituted with the previously unaccepted products. Such a fiendish act is extremely detrimental to the reputation of the trader. There have been fraudulent cases in the past involving dry cargo FCL (Full Container Load) shipments. The goods had been inspected but the stuffing of containers went unsupervised by the importer. The end door layers of the packages in the container contained the goods ordered, while the rest were substituted not with unacceptable but with 'phony cargo'---a combination of cheap bricks and 'rubbish' in the export packages. The 'phony cargo' evaded the Customs detection. Some of these cases stemmed from the trader going bankrupt and the work of a swindler. In certain cases, the manufacturer was not the culprit; it was the work of the trading company with the intention to defraud the overseas buyer.

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Checklist of Progress By this stage in the ChinaDirect Importing Process, you should have completed the following tasks: † Implemented strategies on Production Management † Made the decision on what methods you will utilize to perform an inspection on your goods † Completed the Quality Assurance Checklist † Had the supplier fill out the Quality Assurance Checklist † Gained an understanding of product rejection, rework and reinspection † Gained an understanding of Unauthorized Product Substitution

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Week 11 & 12 – Delivery Management By this fourth and final key stage of the ChinaDirect Importing Process, you have stepped out the following actions: 1) 2) 3) 4) 5)

Research & Tender Sampling & Supplier selection Negotiation & Purchase Order Deposit & Final Purchase Order Established key production dates a. Prior Production Sample completion b. Inspection date c. Production completion date 6) Production management & Progress checks 7) Inspection & Quality Assurance It is now time for you to act on the Delivery Management phase of the importing process. This phase includes selecting a Freight Forwarder, booking the shipping, completing the applicable documents with the supplier and Freight Forwarder, and electing and confirming the final dates for the delivery of your goods.

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Booking Shipping Finding a good Freight Forwarder to bring your products from China to your port can seem like a real challenge. You will need to establish a good relationship with a Freight Forwarder, bearing in mind that this will benefit you in the future if you are importing a second, third or even ongoing orders from China. Focus not only on the price, but on the service that the Freight Forwarder provides. HOT TIP It is important you remember that the Freight Forwarder is your partner in the completion of the importing process, just as much as the supplier. You need to be in full communication with the Freight Forwarder to make sure that they have all of the documents prepared and ready before you make a balance payment. This is done so that the Freight Forwarder can communicate with you about any potential issues that you may have/encounter regarding the Customs clearance and quarantine requirements. As you have already learned, you can take action when you are first organising the order from China, to avoid large costs at the end.

You need to provide the details of the supplier to the Freight Forwarder when you have chosen the company to operate through. A sample of the Shipping Booking can be found over the page.

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Sample of Shipping Booking To , Please contact the following supplier: Example: Shaoxing XXXX Furniture Industry Co., Ltd. Contact person: < Name > Phone: XXXX Address: XXXX, Shaoxing County, Shaoxing City, Zhejiang Province. China Please send me your local agent’s details as well. We have a 40ft container of XX product from them; please ensure it is a direct ship to Brisbane. Please keep me informed of the progress. The production shall be finished prior to as this is urgent shipping, and Customs is waiting for the goods. Please let me know the following: 1. 2. 3.

When the ship is booked Estimated leaving date Estimated Time of Arrival (ETA)

Please also let me know when you have collected all the documents you need for Customs clearance, before I make the balance payment. Thank you and regards,



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Completing the Inspection If you have decided to perform or have an inspection carried out on your goods, you can do the inspection when the merchandise has been completely produced, and is packed and ready for shipment, or at least 80% of the product has been packed. After the inspection report is done, and you are happy with the result, then it is time for shipping. If you are not happy with the inspection result, then utilize the inspection result to negotiate with the supplier item by item for a discount and/or reduced price on your goods. For details, see the previous discussion on Product Rejection, Rework and Re-Inspection.

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Delivery & Shipping Documents After the supplier has sent the goods to the port and the products are on board, you will need to ask the supplier to provide the following documents: • • • •

Commercial Invoice Packing List Bill of Lading Packing Declaration

These four documents are defined over the following pages of the book. The most appropriate method of delivery will be determined according to the urgency of delivery, cost and weight of the products being sourced. These include air freight for lower weight, or urgently required products. Delivery can occur within one week. For heavier products or larger orders, we generally use sea freight. Ask your Freight Forwarder for approximate shipping times.

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Commercial Invoice A Commercial Invoice is simply a bill for the goods from the Seller (Supplier) to the Buyer (You). Commercial invoices are utilized by Customs Officials to determine the value of the goods in order to assess Customs Duties & Taxes. In general there is no standard form for a Commercial Invoice, although they tend to contain many of the following features: • • • • • • • • •

•

Seller's contact information Buyer's contact information Consignee's contact information (if it is different from the buyers) Invoice date A unique Invoice number Sales terms Payment terms Currency of sale Full quantities and description of merchandise o Generally this includes unit price and total price. Product descriptions should be consistent with the buyer's purchase order. Certification that the invoice is correct (Standard language is "We certify that this invoice is true and correct.")

It is very critical that any discount of the transaction be reflected on the invoice, as this is the basis that Customs uses to calculate the import duty and Customs GST. If you are paying anything separate than the goods, make sure you ask for a separate invoice.

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Packing List The Packing List is an extension of the Commercial Invoice, and as such, it looks like a Commercial Invoice. The Packing List will be a match to the Commercial Invoice; the difference is that the Packing List doesn’t show the value of the order, only the details of the volume. The exporter or his/her agent – the Customs broker or the Freight Forwarder – reserves the shipping space based on the gross weight or the measurement of the goods as shown in the Packing List. Customs utilises the Packing List as a checklist to verify the outgoing cargo (in exporting) and the incoming cargo (in importing). The importer uses the Packing List to perform an inventory on the incoming consignment. In general there is no standard form for a Packing List, although they tend to contain many of the following features: •

Catalogue or item number

•

Number of pieces per inner box and number of boxes in an export master carton

•

Each master carton: 1. Net Weight (N.W.) 2. Gross Weight (G.W.)

•

Measurement (Meas)

• Package No. The entries preferably arranged in sequence from the lowest number to the highest, that is, from package No. 1 and up. • “Item No." and "Description of Goods" The description of the goods in the packing list can be in general terms, provided it is not inconsistent with the description in the L/C – the Letter of Credit.

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• Quantity It shows the total quantity within a stated range of the package number and the breakdown in each package. • "Weight" The Packing List shows the total weight within a stated range of the package number and the weight of each package. As far as the carrier is concerned, the gross weight or measurement of a consignment is needed to calculate the freight. In the case that the goods are assessed in the importing country or exported on the net weight basis, it is necessary to show the net weight and gross weight in the packing list. • " Measurement " Ocean shipments are often charged by the cubic meter (CBM or cbm). Sometimes, it is necessary to include the size or dimensions (lengthwidth-height) of the master package. Some carriers may calculate the freight on a cubic feet (cft. or cu. ft.) basis. In the case of an irregular shaped cargo, take the three widest dimensions that describe the smallest cubic space enclosing the cargo to determine the measurement. • " Signature and/or stamp " The Packing List and Commercial Invoice do not need to be signed, unless otherwise stipulated in the Letter of Credit (L/C). In practice, the original and the copy of the Packing List and Commercial Invoice are often signed.

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Corrections or Changes in the Packing List Any visible corrections or changes made in the Packing List must be initialled, as in the Commercial Invoice and all other export documents, by their respective issuers. In practice, the initial usually is done using a rubber stamp bearing the word "CORRECTION". • • • •

Summary of Totals in a Consignment Total Number of Packages Total Quantity If a consignment consists of different units, preferably show all the units used in the summary of totals. Total Weight and Total Measurement

If the net weight and gross weight are used in the break-down, the summary must show the total net weight and the total gross weight. If kgs., lbs., CBM and cft. are used in the breakdown, the summary must show the total of kgs., lbs., CBM and cft – to ensure that the measurements are consistent and accurate. Under certain circumstances, such as in a consignment consisting of a few master cartons where each carton contains several small items of different sizes, it is necessary to show the break-down of the quantity of each item. There is no need to show the break-down of the weight and measurement of each carton. Simply entering the total weight and the total measurement of the consignment in the row summary would satisfy the export requirements.

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Bill of Lading You will need to let the Supplier know who the consignee is and who will be the notifying party. Usually the consignee is yourself; the notifying party can be yourself or the Freight Forwarder. A Bill of Lading is a type of document that is used to acknowledge the receipt of a shipment of goods. A transportation company or carrier issues this document to a Shipper. In addition to acknowledging the receipt of goods, a Bill of Lading indicates the particular vessel on which the goods have been placed, their intended destination, and the terms for transporting the shipment to its final destination. Inland, Ocean, Through, and Air Waybill are the names given to Bills of Lading. An Inland Bill of Lading is a document that establishes an agreement between a Shipper and a transportation company for the transportation of goods. It is used to lay out the terms for transporting items over land to the exporter's international transportation company. An Ocean Bill of Lading is a document that provides terms between an exporter and international carrier for the shipment of goods to a foreign location overseas. A Through Bill of Lading is a contract that covers the specific terms agreed to by a Shipper and Carrier. This document covers the domestic and international transportation of export merchandise. It provides the details of the agreed upon transportation between specific locations for a set monetary amount. An Air Waybill is a Bill of Lading that establishes terms of flights for the transportation of goods both domestically and internationally. This document also serves as a receipt for the Shipper, proving the Carrier's acceptance of the Shipper's goods and agreement to carry those goods to a specific airport.

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Essentially, an Air Waybill is a type of Through Bill of Lading. This is because Air Waybills may cover both international and domestic transportation of goods. By contrast, Ocean shipments require both Inland and Ocean Bills of Lading. Inland Bill of Lading are necessary for the domestic transportation of goods, and Ocean Bills of Lading are necessary for the international carriage of goods. Therefore, Through Bills of Lading may not be used for Ocean shipments. Inland and Ocean Bills of Lading may be negotiable or non-negotiable. If the Bill of Lading is non-negotiable, the transportation carrier is required to provide delivery only to the consignee named in the document. If the Bill of Lading is negotiable, the person with ownership of the Bill of Lading has the right of ownership of the goods and the right to re-route the shipment.

Packing Declaration It is an Australian Customs requirement to have each and every supplier fill in the Packing Declaration. You need to write step-by-step instructions to ask the supplier to fill it in, so they avoid mistakes, and therefore delays at Customs.

Balance Payment After you have received the Bill of Lading it is time for you to make the balance payment. ChinaDirect will usually ask the supplier to do a telegraphic release for the Bill of Lading so that the supplier doesn’t need to send the original documents to us. Make sure that you send the bank slip to your supplier to show them that you have paid the money to them, remembering that this will build trust between you and your supplier for future transactions.

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Sea Freight Container Dimensions To assist you with the booking shipping for your goods to be transported from China, we have provided you with the dimensions of Sea Freight Containers as a reference.

General Purpose Container 20'x8'x8'6

Millimetres Internal Dimensions

Door Opening

Weight

Feet

Length L1

5,898

19' 4.2"

Width B1

2,352

7' 8.6"

Height H1

2,391

7' 10"

Width B2

2,340

7' 8"

Height H2

2,280

7' 5.8"

Kilograms

Pounds

24,000

52,910

Max Gross Tare

2,289

5,090

Max Payload

21,720

47,885

Cube Meters

Cube Feet

33,2

1,171

Internal Capacity

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General Purpose Container 40'x8'x8'6

Millimetres

Feet

Length L1

12,040

39'5.3"

Width B1

2,353

7'8.5"

Height H1

2,383

7'9.7"

Door Opening

Width B2

2,340

7'8"

Height H2

2,280

7'5.8"

Weight

Max Gross

Internal Dimensions

Kilograms

Pounds

30,480

67,200

Tare

3,830

8,450

Max Payload

26,650

58,630

Internal Capacity

Cube Metres

Cube Feet

67.7

2,390

High Cube General Purpose Container 40'x8'x9'6

Internal Dimensions Door Opening

Weight

Millimetres

Feet

Length L1

12,040

39'5.3"

Width B1

2,353

7'8.5"

Height H1

2,697

8'10.1"

Width B2

2,340

7'8"

Height H2

2,597

8'6.2"

Kilograms

Pounds

Max Gross

30,480

67,200

Tare

3,830

8,450

Max Payload

26,650

58,630

Cube Metres

Cube Feet

76.3

2,694

Internal Capacity

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Open Top Container 20'x8'x8'6'

Internal Dimensions

Door Opening

Weight

Length

Millimetres

Feet

5,902

19' 4.3"

Width

2,240

7' 4.1"

Height

2,352

7' 8.5"

Width

2,335

7' 7.9"

Height

2,240

7' 4.1"

Kilograms

Pounds

Max Gross

24,000

52,910

Tare

2,440

5,380

Max Payload

21,560

47,520

Cube Metres

Cube Feet

32.2

1,133

Millimetres

Feet

Internal Capacity Open Top Container 40'x8'x8'6 Internal Dimensions

Door Opening

Weight

Length

12,021

39' 5.2"

Width

2,350

7' 8.4"

Height

2,330

7' 7.7"

Width

2,338

7' 8"

Height

2,234

7' 3.8"

Kilograms

Pounds

36,000

79,370

Max Gross Tare

4,430

9,760

Max Payload

31,570

69,600

Cube Metres

Cube Feet

66.7

2,355

Internal Capacity

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Flat rack Container 40'x8'x8'6

Internal

Weight

Millimetres

Feet

Length

12,032

7' 6.2"

Width

2,240

7' 4.1"

Height - Unfolded - Folded

2,034 570

6' 8.1" 1' 10.4"

Kilograms

Pounds

45,000

88,180

Tare

5,530

12,190

Max Payload

39,470

87,020

Max Gross

Internal Capacity

Cube Metres

Cube Feet

54.8

1,936

Millimetres

Feet

Flat rack Container 20'x8'x8'6 Internal

Weight

Length

5,727

18' 9.4"

Width

2,240

7' 4.1"

Height - Unfolded - Folded

2,170 420

7' 1.3" 1' 4.6"

Kilograms

Pounds

30,480

66,140

Max Gross Tare

2,950

6,500

Max Payload

27,530

60,690

Cube Metres

Cube Feet

27.9

986

Internal Capacity

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Refrigerated Container 20'x8'x8'6

Millimetres Internal Dimensions

Door Opening

Weight

Internal Capacity

Feet

Length

5,455

17' 11"

Width

2,294

7' 6.2"

Height - Nominal - Useable

2,288 2,188

7' 6" 7' 2"

Width

2,268

7' 5.3"

Height

2,215

7' 3.1"

Kilograms

Pounds

Max Gross

24,000

52,800

Tare

2,950

6,503

Max Payload

21,050

46,407

Cube Metres

Cube Feet

Nominal Useable

28.6 27.4

1,010 967

Refrigerated Container 40'x8'x8'6 Internal Dimensions

Door Opening

Weight

Internal Capacity

Millimetres

Feet

Length

11,587

38' 0.1"

Width

2,259

7' 4.9"

Height - Nominal - Useable

2,219 2,119

7' 3.4" 6' 11.4"

Width

2,283

7' 5.9"

Height

2,117

7' 1.7"

Kilograms

Pounds

Max Gross

32,000

70,550

Tare

4,350

9,590

Max Payload

27,650

60,960

Cube Metres

Cube Feet

58.1 55.5

2,051 1,959

Nominal Useable

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Summary Your dates for the shipment of your goods from the supplier in China to you, have been set, and organised with your selected Freight Forwarder. After you have made your balance payment, and sent the Commercial Invoice, Packing List, Bill of Lading and the Packing Declaration to the Freight forwarder, they will carry out the Customs clearance. As the importer, you must specify where the containers of goods are going to be delivered to. There are requirements for the time period that you have to unload your goods and return the containers to the shipping company. You can check these requirements with your Freight Forwarder. When all of your transportation and delivery arrangements have been decided and specified, it is then on to the final step of the importing process – waiting for the Freight Forwarder to deliver your goods to your door!

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Checklist of Progress By this stage in the ChinaDirect Importing Process, you should have completed the following tasks: † Gained an understanding of what’s involved in Delivery Management † Understood the following things: Commercial Invoice, Packing List, Bill of Lading, Packing Declaration † Sent these four completed documents to your Supplier – Commercial Invoice, Packing List, Bill of Lading, and Packing Declaration † Gained an understanding of the different sizes of Sea Freight Containers that your goods will potentially be transported in

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PART THREE – IN SUMMARY In the final part of Importing from China – How To Start Your Own Import Business Without Losing Your Shirt, you will find the following things:

1. A Summary of the ChinaDirect Importing Process 2. A Glossary of Terms 3. ChinaDirect Contact Details 4. Thank You from ChinaDirect

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In Summary Congratulations!!! You have successfully completed the ChinaDirect Importing Process. It is always good practice to send a Thank You note to your supplier, and also to your Freight Forwarder to acknowledge the people who have delivered the services and quality they promised , and also to provide them with any feedback you may have. This can also strengthen your relationship with your supplier and/or Freight Forwarder for future interactions and business contracts. ChinaDirect always complete a project summary after the goods have arrived at the destination, and been delivered to the client’s door. The project summary includes the following: • • • •

An analysis on how much time we invested in the project An analysis on how much money was invested in the project A comparison to the costs of buying from the local manufacturer and/or wholesaler, and A determination of the overall saving that was made by importing from China.

The Project Summary takes on a similar format to the Landed Cost Analysis, as shown in Part Two of the book. Remember – the most important thing for you to do is Take Action and Have Fun!

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Glossary Tariff A duty (or tax) levied on goods transported from one customs area to another. Tariffs raise the prices of imported goods, thus making them less competitive within the market of the importing country.

International Commerce (INCO) terms Shipping terms set the parameters for international shipments, specify points of origin and destination, outline conditions under which title is transferred from seller to buyer, and determine which party is responsible for shipping costs. They also indicate which party assumes the cost if merchandise is lost or damaged during transit. To provide a common terminology for international shipping, the following INCO terms have been developed under the auspices of the International Chamber of Commerce.

Cost and Freight (C&F) The exporter pays the costs and freight necessary to get the goods to the named destination. The risk of loss or damage is assumed by the buyer once the goods are loaded at the port of embarkation. Cost, Insurance and Freight (CIF) The exporter pays the cost of goods, cargo and insurance plus all transportation charges to the named port of destination. Ex Works (EXW) The price quoted applies only at the point of origin and the seller agrees to place the goods at the disposal of the buyer at the specified place on the date or within the period fixed. All other charges are for the account of the buyer. Free on Board (FOB) The goods are placed on board the vessel by the seller at the port of shipment specified in the sales contract. The risk of loss or damage is transferred to the buyer when the goods pass the ship's rail. ©2008 ChinaDirect Sourcing Services Pty Ltd 93

Free on Board Airport (FOB Airport) Based on the same principles as the ordinary FOB expression, the seller's obligation is fulfilled by delivering the goods to the air carrier at the specified airport of departure, at which point the risk of loss or damage is transferred to the buyer.

Transportation and Delivery Terms The following are common terms used in packing, labeling, transporting and delivering goods to international markets. They are in addition to the above INCO terms. Bill of Lading (Ocean or Airway) A contract prepared by the carrier or the freight forwarder with the owner of the goods. The foreign buyer needs this document to take possession of the goods. Certificate of Origin A document that certifies the country where the product was made (i.e. its origin). A common export document, a certificate of origin is needed when exporting to many foreign markets. Commercial Invoice A document prepared by the exporter or freight forwarder, and required by the foreign buyer, to prove ownership and arrange for payment to the exporter. It should provide basic information about the transaction, including description of goods, address of shipper and seller as well as delivery and payment terms. In some cases, the commercial invoice is used to assess customs duties. Customs Declaration A document that traditionally accompanies exported goods bearing such information as the nature of the goods, their value, the consignee and their ultimate destination. Required for statistical purposes, it accompanies all controlled goods being exported under the appropriate permit. Customs Invoice A document used to clear goods through customs in the importing country by providing documentary evidence of the value of goods. ©2008 ChinaDirect Sourcing Services Pty Ltd

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In some cases, the commercial invoice (see glossary entry) may be used for this purpose. Ex Factory Used in price quotations, an expression referring to the price of goods at the exporter's loading dock. Export Permit A legal document that is necessary for the export of goods controlled by the Government of export country, specifically goods included on the Export Control List. Freight Forwarder A service company that handles all aspects of export shipping for a fee. Insurance Certificate A document prepared by the exporter or freight forwarder to provide evidence that insurance against loss or damage has been obtained for the goods. Landed Cost The cost of the exported product at the port or point of entry into the foreign market, but before the addition of foreign tariffs, taxes, local packaging/assembly costs and local distributors' margins. Product modifications prior to shipment are included in the landed cost. Packing List A document prepared by the exporter showing the quantity and type of merchandise being shipped to the foreign customer. Pro Forma Invoice An invoice prepared by the exporter prior to shipping the goods, informing the buyer of the goods to be sent, their value and other key specifications. Quotation An offer by the exporter to sell the goods at a stated price and under certain conditions.

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Financial and Insurance Terms The following are the most commonly used terms in international trade financing. Consignment Delivery of merchandise to the buyer or distributor, whereby the latter agrees to sell it and only then pay the exporter. The seller retains ownership of the goods until they are sold, but also carries all of the financial burden and risk. Document of Title A document that provides evidence of entitlement to ownership of goods, e.g. carrier's bill of lading. Letter of Credit An instrument issued by a bank on behalf of an importer that guarantees an exporter payment for goods or services, provided the terms of the credit are met. Letter of Credit (Confirmed) A local bank confirms the validity of a letter of credit issued by a foreign bank on behalf of the foreign importer, guaranteeing payment to the local exporter provided that all terms in the document have been met. An unconfirmed letter of credit does not guarantee payment so, if the foreign bank defaults, the local exporter will not be paid. Local exporters should accept only confirmed letters of credit as a form of payment. Letter of Credit (Irrevocable) A financial institution agrees to pay an exporter once all terms and conditions of the transaction are met. No terms or conditions can be modified without consent of all parties. Open Account An arrangement in which goods are shipped to the foreign buyer before the local exporter receives payment.

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Partnership, Alliance and Market Entry Terms The following expressions define the various types of partnership or alliance arrangements as well as methods of market entry common in international trade. Agent A foreign representative who tries to sell your product in the target market. The agent does not take possession of and assumes no responsibility for the goods. Agents are paid on a commission basis. Distributor (Importer) A foreign company that agrees to purchase a local exporter's product(s), and then takes responsibility for storing, marketing and selling them. Franchise This is a more specific form of licensing. The franchise is given the right to use a set of manufacturing or service delivery processes, along with established business systems or trademarks, and to control their use by contractual agreement. Joint Venture An independent business formed cooperatively by two or more parent firms. This type of partnership is often used to avoid restrictions on foreign ownership and for longer-term arrangements that require joint product development, manufacturing and marketing. In a specifically American legal context, however, a joint venture is a collaboration between two companies to carry out a particular, individual project. The venture lasts only as long as the project does and is governed by the partnership laws of the state where it was formed. Licensing Although not usually considered to be a form of partnership, licensing can lead to partnerships. In licensing arrangements, a firm sells the rights to use its products or services but retains some control. ©2008 ChinaDirect Sourcing Services Pty Ltd

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Trading House (or Company) A company specializing in the exporting and importing of goods produced or provided by other companies.

Legal Terms The following are some of the more common legal terms encountered in international transactions. Arbitration The process of resolving a dispute or a grievance outside of the court system by presenting it to an impartial third party or panel for a decision that may or may not be binding. Contract A written or oral agreement which the law will enforce. Copyright Protection granted to the authors and creators of literary, artistic, dramatic and musical works, and sound recordings. Intellectual Property A collective term used to refer to new ideas, inventions, designs, writings, films, and so on, protected by copyright, patents and trademarks. Patent A right that entitles the patent holder, within the country which granted or recognizes the patent, to prevent all others for a set period of time, from using, making or selling the subject matter of the patent. Trademark A word, logo, shape or design, or type of lettering which reflects the goodwill or customer recognition that companies have in a particular product.

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Sampling and Inspection Terms Lot Size and Sample Size The lot size - batch size or shipment size - is the total units in a consignment. The sample size is the total units of product that have to be drawn from the lot for inspection. Referring to the Single Sampling Plan, a lot size of 12 requires a sample size of 3, and a lot size of 300 requires a sample size of 50. AQL% The AQL% stands for the Acceptable Quality Level. In the Single Sampling Plan the AQL% ranges from 0.25 to 6.5. The lower the AQL%, the stricter the requirement. The letter A is the Acceptance number of the Total Demerit Rating, while letter R is the Rejection number. For example, a lot size is 800 and the sample size is 80, if the prior agreement between trader and vendor calls for an AQL% of 0.25, it means that at least one (1) defect found in the lot constitutes grounds for the rejection of the entire lot. The AQL agreement, if any, between trader and vendor (or between importer and exporter) usually calls for two AQL%, that is, one Major and one Minor. For example, a lot size is 5,000, the sample size is 200, and the agreed AQL% for Class A is 0.40 and Class B is 2.5. If the Total Demerit Rating from the Inspection Report for Class A is 3 or more, the lot is rejected. If the Total Demerit Rating for Class B is 11 or more, the lot is rejected too. In other words, if either Major or Minor is rejected, the lot is rejected. On the other hand, if the Total Demerit Rating for Class A is 2 or less and for Class B is 10 or less, the lot is accepted for shipment. In practice, the AQL% is rarely specified for Class C. In the event of many Class C defects and no AQL% is specified, the inspector may decide or refer to the management for a decision. Products with a Class C defect are usually easy to rework. Description and Item No. Description and Item No indicates the product that is to be inspected in the Description (e.g. Photo frames). An Inspection ©2008 ChinaDirect Sourcing Services Pty Ltd

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Report normally is issued to each item number. However, different item numbers belonging to the same group can be treated as one lot. For example, a table lamp has six different colours and each colour has an independent item number. One Inspection Report can be used to cover the group, instead of six reports. Contents of Defects Write the description of the defect on the pertinent defect class and put a Roman numeral one 'I', or a letter 'A', 'S', 'B', or 'C' as the case requires, under the Rating column. At the end of inspection, count the number of defects and record the totals in the Total Demerit Rating, which is used to gauge the acceptance or the rejection of the lot based on the agreed AQL%. Cost Implication of AQL% The lower the AQL%, the higher the cost of production. For example, in the normal production of 1,500 pieces of product X, the manufacturer attains a Major AQL% of 4.0 (i.e., 10 or less Class A defects occur out of 125 pieces of sample). If the buyer requires an AQL% of 0.40 (i.e., 1 defect or none), the manufacturer needs tighter quality control over the incoming components, work in process, and finished goods.

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Contact Details Head Office: +61 7 3392 1421 Fax: + 61 7 3112 4357 Address: 155 Lytton Rd East Brisbane Queensland 4169 Australia Email: [email protected] Web: www.chinadirectsourcing.com.au

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Thank You for Reading Importing from China – How To Start Your Own Import Business Without Losing Your Shirt. From the team at ChinaDirect Sourcing, we hope you have thoroughly enjoyed reading this book, and received incredible value in the process. We welcome you to contact us when you need assistance, and wish you every luck and prosperity in your journey! Thank You.

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