Are you looking for a manufacturing partner? A quick search on Google or Alibaba will surface hundreds of results. It isn’t challenging to find a factory. But it is a much harder task to find the right one.
Entrepreneurs struggle to find and vet a manufacturing partner overseas. Many turn to sourcing agents to be their in-country representative. Sourcing agents can make the task of getting your product made easier but a relationship with them comes with inherent risks.
How do you know if they’re connecting you with the best factory and negotiating the best price? Often they are secretly working on the factory’s behalf.
Here’s what you need to know about the risks of working with a sourcing agent.
What is a sourcing agent?
When working with a factory overseas, there are four common options for getting your product made:
- You can work with a third party.
- An individual can partner directly with the manufacturer (direct purchase.)
- You can partner with a trader or distributor.
- A final option is to work with a sourcing agent.
According to one report, 80% of entrepreneurs work directly with the manufacturer, which gives them control over the process and saves money from avoiding commissions and fees to a third party or agent.
However, if you’re new to sourcing, you might want to bring on a sourcing agent: someone who manages the relationship with the factory. A sourcing agent is someone who can reach out to a supplier or manufacturer to source the product you need, making a commission in the process.
Sourcing agents offer a measure of control over the final product, customization, and a lower fee than working with a distributor or trader.
But there are several risks to working with a sourcing agent.
The risks of working with sourcing agents
Sourcing agents aren’t always as altruistic – or as helpful – as they might appear. A sourcing agent can provide access to a network of vetted factories and save entrepreneurs time. They can help you navigate the process and serve as your in-country representative.
According to reputable sources, 90% of sourcing agents get hidden commissions from factories. “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. There are a few ways a sourcing agent charges for their work. Some charge a large flat fee upfront; others charge “a percentage of your manufacturing transactions for some set period or a set number of transactions.”
In each of these instances, it’s easy for the sourcing agent to find a low-cost (and often low-quality) manufacturer and split the difference with the factory. For example, a sourcing agent could charge an entrepreneur $1,000 upfront for a job that costs $500.
The entrepreneur knows nothing about the $500 difference split between the sourcing agent and the manufacturer. Other sourcing agents charge hidden commissions or source the product from a different factory than they’ve advertised.
How to vet a sourcing agent
It is tough for an entrepreneur to verify that a sourcing agent is transparent about their role in the transaction. But, sourcing agents can also be invaluable partners. Vetting a sourcing agent requires asking the right questions and getting referrals from other entrepreneurs that have gone through this same process.
Some questions you should ask a potential sourcing agent partner include:
- Who will pay the sourcing agent, and how are they paid?
- Does the sourcing agent perform quality-control inspections, or do they outsource to a third party?
- Can the sourcing agent provide at least two testimonials from similar companies (e.g., entrepreneurs who are manufacturing a similar product)?
- What systems and processes do they have in place for managing the manufacturer?
- What guarantee do they offer in case a supplier falls behind schedule, scams you in some way, or produces a poor-quality product?
There are other great options besides working with a sourcing agent.
Gembah provides access to a network of factories with proven capabilities and a track record of success. For more resources, check out our manufacturing guides – starting with how to manufacture in China like a pro.