Outsourcing from China? Here’s how to review quotes like a pro

As a business owner looking to lower your business costs by outsourcing your manufacturing requirements to low-cost regions of the world, you’ve done your homework: You’ve shortlisted your suppliers, verified their credentials, explained your manufacturing requirements, sent them your drawings and specifications, and now just await their quote.

Most of the hard work is over, right? Wrong.

One of the most important steps in the outsourcing process is reviewing quotes from your supplier to ensure, among other things, it has the details you both agreed upon. You must also understand what is being quoted. Here is a checklist of four things to look at while reviewing such quotes:

1. Product details is key

When you first receive a quote from a supplier, it is imperative that you check if the details of your product are on it. Do remember that just because you sent across your drawings and your supplier confirmed they have received it, does not mean all the necessary information made it to the end of the line. Here are three questions you could ask:

a. Is the name of your product listed on the quote? This is a simple but good check to ensure that your supplier opened your 2D drawing and took the time to state the actual name of your product on the quote.

b. Is your drawing number and revision correct? When sourcing from low-cost countries, it is common for changes to be made to the drawing or revision before going into tooling and mass production. With that in mind, it is important to confirm that the drawing number and revision match what you expect to have produced, as changes in finish, process, and material can greatly affect your pricing. You will also need to confirm if the current quote is for the final drawing and revision, and not for previous iterations.

c. Does the stated quantity match your expected purchasing? Much like finish, process, and material affect pricing, quantity can make a big difference to price. For instance, think of the difference in price when you buy a bottle of water from a gas station or a case of bottled water from one of the big stores. A greater quantity almost always corresponds to a better price per unit. So do check if the quantity stated on the quote is the quantity you expect to purchase as any mismatch will affect the price you are being quoted.

2. Shipping method

Understanding the terms listed on your quote will help you know what to expect when your product is being transported from the factory abroad to the dock in your home country. Here are a few common international commerce terms, or incoterms, that outline the responsibilities of the buyer and seller. These pre-defined terms are accepted internationally by governments and legal authorities, and are used to prevent misunderstandings.

a. EXW or ExWorks - This is the most basic and least helpful method of shipping you can receive from a supplier. Their only responsibility here is that your product is available to be picked up at the location, which is usually the factory or warehouse of the supplier. You will be left to figure out every step from there to your dock. In short, you will pay for the shipping, and all its risks also lie with you. You will also deal with customs and associated costs, if any. The advantage of this method is that the supplier will not be making a profit by inflating shipping costs.

b.  FOB or Free On Board - Under this method of shipping, the supplier will help get your product to the port, submit the paperwork required and load the goods on the vessel after customs clearance. Once on the ship, all the responsibility for the goods, the risk and the expense of shipping falls on the buyer. If your shipment is not a full container, however, it will need to be consolidated along with other cargo into a container at a Container Freight Station, which charges a fee for this. Some suppliers do not cover this cost under free on board shipping.

c. DDP or Delivered Duty Paid - Under this agreement, the seller takes responsibility for all the risks and costs associated with delivering your shipment to the agreed destination. The seller will also carry out customs formalities, taking care of all export and import duties.

This is a great option for buyers who are not experienced in moving products from low-cost countries to your shores, or if you have limited time and manpower. If you choose this option, you will just need to send your purchase order and wait for your products to reach your destination. Little or no input is required from you until the product is delivered.

3. Terms of payment

There is almost an endless combination of terms of payment that you can negotiate with your supplier. It is important to make sure that the terms used on your quote are both clearly defined and acceptable to both parties. To start with, remember it is common for the terms of payment for the sampling or tooling phase to be different from the terms agreed upon for mass production of the product.

a. Sampling or tooling: 50% down payment and the balance on sample approval is a standard practice used to mitigate the risks between a supplier being unable to produce to your standards and a customer getting samples made and never returning to pay the balance.

b. Mass production: The terms of payment for mass production are determined by the agreement between you and your supplier. A variety of combinations can be reached.

Here’s a tip about negotiating the best terms for yourself – after all don’t all business owners want that? One of the most important ways to do this is to build a long-term and profitable relationship with your supplier. This will require some patience. When you first start a relationship with a new supplier, it is likely that you will need to accept terms that seem to be in their favor, after all they are taking the risk to purchase your raw material and employ the many people required to produce your product. But after some time, if you return to place more orders, the supplier will feel more confident in dealing with your business, and you will have the opportunity to renegotiate terms that are more favorable to you and your cash flow.

4. Currency exchange

It is imperative that you understand currency exchange rates in order to do business with foreign companies. This aspect is often overlooked by many who seek to outsource their manufacturing. If you pay attention to currency rates and protect yourself against the possibility of currency fluctuations, you could save yourself a lot of money and stress.

You have to check if the quote mentions the exchange rate. If it doesn’t, ask the supplier to add it. This will give you the opportunity to negotiate for better pricing if the rate changes in your favor. This will also help when your supplier increases the price, citing a fluctuation in currency, as it will help you ascertain what the exchange rate was at the beginning and how much it has changed since then.

The key focus of global sourcing agent Sourcing Allies is to ensure that the sourcing process, manufacturing, and delivery of your goods is as efficient as possible. All this with the right price, quality and lead time.