Are you at the point in your product development journey where you need to find your manufacturing partner? A quick online search of off-shore suppliers will pull up hundreds of results. It’s not hard to find Chinese suppliers or list factories in Hong Kong, Mexico, or Vietnam. In fact, you may get contacted by potential partners on LinkedIn all the time. What is hard is finding the right one.
Entrepreneurs struggle to find and vet a manufacturing partner overseas because there are so many options. Also, sometimes startups don’t have experience or contacts, haven’t dealt with language barriers in the workplace, and don’t know what uncertainties they will confront. One option, using a sourcing agent, can make finding and managing a manufacturing partner much easier. However, even though the benefits of having a single point of contact who knows the local options has significant advantages, it does come with some inherent risks.
This article explains what a sourcing agent is and some of the risks involved. It also offers advice on finding and vetting your procurement partner. Locating the best sourcing agent is about more than finding the best price or identifying someone who speaks English. It’s about choosing a cost-effective representative of your best interests who also knows the local ecosystem — everything from where to get raw materials to the most reliable manufacturers to how to ship items and how to generally get things done.
What Is a Sourcing Agent?
When you’re building a supply chain that includes manufacturing in Mexico, China, or another foreign country, you need to find someone to make the product, negotiate prices, manage the actual production, handle quality control, and get your products shipped. It can be a steep and expensive learning curve if you haven’t done any of those steps before.
Knowing the limitations of the internal resources you have as a young, small business, you need to choose wisely from four common options for getting your product made:
1. Work Directly With the Factory
If you have the bandwidth and the experience, partnering directly with a factory lets you avoid paying intermediaries or agents. It gives you complete control and responsibility over the process.
2. Pay a Third-Party Source
A third party will find your factory, manage everything, and run almost every aspect of procurement. They offer one-time fees and transparency. However, they require up-front payment and can be expensive.
3. Work Through a Trading Company
A trader is a middleman that fills your order. They handle everything then charge you for the final product. Working with this type of sourcing company gives you little control and has higher long-term costs. But it’s fast and easy.
4. Utilize a Sourcing Agent
A sourcing agent is a person or small business that is your resource on the ground. They work to find your factory, assist in negotiations, and help fix problems when they come up. They receive a commission when you pay the factory.
The sourcing agent is a popular solution because you may not have the experience or internal resources to work directly with the factory. A distributor, whether a third party or trader, can be expensive. A sourcing agent gets paid a percentage of what the factory gets paid, making compensation simple. In short, they are your representative in the country you have chosen to work in and they are getting paid to solve problems, find resources, and advocate for your best interest.
A sourcing agent can be an attractive option for a first-time entrepreneur looking for a way to cost-effectively manufacture their product and maintain competitiveness in the market. However, there are several risks involved in using a product sourcing agent.
The Risks of Working With a Sourcing Agent
Sourcing agents aren’t always as altruistic as they might appear. On the one hand, a sourcing agent can provide access to a network of high-quality, vetted factories and have the potential of saving entrepreneurs time and money. They can help you navigate the process and serve as your in-country representative, dealing with local customs, regulations, and the language.
Problems arise because they may also get paid by suppliers. The way the business model is supposed to work is for the agent to receive a commission based on what you pay the factory. But manufacturing is a very competitive industry, and factories looking for customers are often tempted to sway agents to send work their way.
According to reputable sources, 90% of sourcing agents get hidden commissions from factories. Not only do you end up paying that commission in higher costs, it also divides the agent’s loyalty.
“As a result, when things go wrong, they often tend to defend the factory,” writes one expert. “Some intermediaries are invaluable. Others are completely incompetent or, even worse, flat-out crooks. Some do not even reveal they are acting as an intermediary, leading you to believe you are dealing directly with the factory.”
Sourcing agents commonly take advantage of uninformed entrepreneurs by manipulating the pricing in the factory’s favor and, since they get a percentage, their own commission. They skip factory audits and may not have your best interest in mind when they carry out price negotiations.
Another way that a sourcing agent can make money is to find a low-cost, and often low-quality, manufacturer, charge you what quality suppliers would charge, and split the difference with the factory.
As an example, most of the bids for a project from good suppliers may result in a competitive price of $10 per part. An unscrupulous sourcing agent may find a supplier that cuts corners and can do the work for $7 per part. The agent charges you $10 and splits the $3 difference with the factory. Over thousands of parts, that $3 can add up, and you, the entrepreneur, know nothing about the non-value-added cost you are paying for.
How to Vet a Sourcing Agent
Although it’s difficult for an entrepreneur to verify that a sourcing agent is transparent about their role in the transaction, taking the following steps can help you find a sourcing agent who can become an invaluable partner. Vetting a sourcing agent, in China or any other country, requires asking the right questions and getting referrals from other companies that have gone through this same process.
Investing some time with several potential sourcing agents upfront can save you considerable costs and headaches down the road and also lead you to the right supplier. Finding your manufacturing partner is a critical step in the product development process, so invest the same passion and focus as you do into research, design, and prototyping.
Some questions you should ask a potential sourcing agent partner include:
Who will pay the sourcing agent, and when and how are they paid?
You should be the only person paying for sourcing services. And your sourcing agent should receive payment from you directly only when you pay the supplier. If money flows earlier to or from a different source, they are no longer your agent — they are working for other people.
Does the sourcing agent perform quality-control inspections, or do they outsource to a third party?
After finding the right supplier, using quality inspections to ensure the chosen factory properly manufactures your product is the second most crucial thing a sourcing agent does. If they outsource this step to a third party it adds cost, potential errors, and is another source of hidden fees and kickbacks.
Can the sourcing agent provide at least two testimonials from similar companies to yours?
Nothing beats sitting on the phone with someone who has already done what you are trying to do and grilling them on the sourcing services your potential agent provided. Be brutally frank and ask the hard questions. Talk to references in the same or similar industry that has made the same types of products as you are designing. If they don’t rave about the sourcing agent, move on to the next one.
What systems and processes does the sourcing agent have in place for managing the manufacturer?
What you don’t want is a sourcing agent who writes things down on envelopes and consistently drops the ball. Global sourcing is not easy. There are a lot of moving parts and the unexpected is the only thing you can expect. You want someone with years of experience and the systems in place to efficiently represent your interests with the supplier. If they spend more time trying to flatter or entertain you than they do talking about project management processes, they don’t have the capabilities you need.
What guarantee does the sourcing agent offer in case a supplier falls behind schedule, takes advantage of you, or produces a poor-quality product?
Remember, your sourcing agent is representing you and they are getting paid to take on the responsibility of finding a suitable supplier, ensuring product quality, and making sure you are getting charged competitive prices. If they are not willing to guarantee performance in some tangible way, they are not the right partner for you.
Finding the Right Sourcing Agent Is About Experience and Trust
You are pouring your heart and soul, and probably your savings and financial future, into bringing your idea for a product to market. The success or failure of your business often depends more on who you choose to work with than how good your product idea is.
If you decide that using a sourcing agent is the best way to manufacture your product, make sure you find a partner with experience that you can trust. Don’t be afraid to follow up and also talk to the factory directly. A partner is someone who works with you, shares information, and is always looking after your best interests.
Gembah has many free online resources, including a guide to manufacturing in China and an informative webinar, “Manufacturing in China: The Power of Relationships.” We also have great background information on production in Mexico, Vietnam, or India. Dig around, and feel free to reach out if you have any questions.
Global sourcing is just one step in the process of bringing your product to market. Working with a partner who can help create and produce your product will make your journey easier and increase your potential for success. Gembah is here to help wherever we can at every step of that journey.