Earlier this week I received an email titled Five Pitfalls of Metals-Based Sourcing from old friend Lisa Reisman of Metalminer (her husband Jason writes Spendmatters) where she laid out what she sees are the five essential mistakes people make when sourcing metals in commodity form.

1. Misreading the supply market can result in the placement of large resting or standing orders as prices decrease, or in failing to place large, timely orders to avoid price increases.
2. Using a 3-bid monthly buy. Here the buying organization believes it has purchased at or below market because it went with the supplier who offered the best pricing and terms on a monthly basis, for that month’s orders. But bidding on a monthly basis is almost never the best lowest total cost option. In fact, we’d go so far as to say that companies that deploy this practice, nearly always have a substantial cost-savings opportunity available to them.
3. Failure to implement index-based buying strategies. The result here is a lack of visibility into the actual costs that comprise the delivered price.
4. Assuming that a buyer’s size or reputation guarantees that it receives the best price. Without using data to validate its assumption, the buying organization believes that because a particular supplier has been a “partner” for many years and receives $Xm of business from a customer annually, the supplier must be supplying at “better than market” prices.
5. Making purchases by unit or each, rather than by weight. There are a couple of exceptions where this practice is advantageous, but it generally is not. We have seen instances where suppliers/producers “ship light” selling metal on a unit cost basis that results in the buying organization overpaying for materials. Moreover, buying on a unit or each basis can prevent the buying organization from seeing the true costs (such as the raw material and the fabrication costs) that make up the total price.

It is a piece that is backed up by her recent white paper (download here), and I have a few comments on the above based on my own experience.

1.  Her first observation is spot on.  There is a lot of speculation in the market about the true source of demand for metals, and there is plenty of evindence to suggest that a lot of recent demand driving prices up is artificial (investors and mis-allocated funding from SOEs).  It is a dynamic market that has seen large swings in pricing, and while opportunities to buy on the dips exist for manufacturers/ traders, if one were a commodity trader the market could easily swing against you.

For myself, the last 6 months were a great time to stock up.  AL pricing was off nearly 50% from the highs of 2 years ago… and there was space in the warehouse.

2. This is an observation that I would say largely depends on the purchase cycles, sizes, and needs of the buyers.  3 month averaging is a great way to flatten things out, but if you were buying at 24,000RMB/ ton 2 years ago and it is swinging from 13,000 to 16,000 now, then perhaps some firms may find going to a month to month or spot market advantageous.  Especially if holding cash, and are willing to store for a few months

3.  Totally agree. For our largest client, we actually provided a spreadsheet where current RMB and metal pricing could be changed, and the final landed price would appear.  they really liked that level of transparency.

4. Without knowing the spot market prices in China, companies are in the dark, and trusting someone else to manage a commodity purchase in the blind is just asking for it.  Firms need to play an active role in managing these commodity costs, especially if the order sizes are significant.

5. This is an area where my experience differs a bit.  We have largely used per piece pricing, but we have people on the ground checking for quality and cross counts occur at multiple steps in the process.  Were we an offshore buyer with no one to count, then I would agree..  however, then the issue of alloys can easily become an issue, nd weights can be fudged.

Anyone else out there have a similar/ different experience to report?

Check out MetalMiner for more.

With only 6 shopping days left before Christmas, it looks like Mattel is going to need to pull out all the stops to make up for the fact that their 2oo7 Lead Paint Barbie has cost the firm another 12 million USD.

According to the Massachusetts Office of the Attorney General:

Massachusetts Attorney General Martha Coakley, along with the Attorneys General of 38 other states, reached a settlement agreement with Mattel, Inc., and its subsidiary, Fisher-Price, Inc., resolving a 15-month investigation into the events that lead to a voluntary recall of the companies’ toys for excessive lead paint in 2007. The consent judgment, filed today in Suffolk Superior Court, requires Mattel to make a payment of $12 million by January 30, 2009, to be divided among the participating states.

Before Mattel apologized for misrepresenting the fact that it actually was NOT China’s fault that they failed to properly design the magnets, and that it actually was NOT China’s fault that Mattel’s own team failed to follow its own inspection guidelines, I wrote extensively on the fact that firms who outsource in China are responsible for maintaining quality standards and systems of their new supply chain.

There were some who initially disagreed and wanted to place the blame on China, but as of today there are now 39 AGs who also support this idea.

Here are some other related posts:
If you want something done right… You Gotta Do It Yourself
Avoid the Middleman! INVEST in Your QC!!
Assess Your Risk, Plan, and THEN Outsource to China
How to Build a Strong Outsourcing Platform in China
Finding the Right Suppliers – Part 1
Finding the Right Suppliers – Part 2

With the

We have all seen just how risky sourcing from China can be should one not have the proper systems in place, and during my time in China I have been asked a lot about how to  import from China.

Sometimes the questions are coming from people who are just entering the sourcing space, and sometimes the questions come from people who just want to buy a couple hundred pieces of something as a hobby.

This 10 part series (each clip is around a minute) offers up some good advice.  It is the basics, but for those who are just looking at how to get started, this series is a good set of ten tips to follow. There are surely more, but for the purposes of this post I would say it has covered a good half of the questions I have been asked multiple times in the past.

Where I would say the biggest gap exists is that he does not fully address the need for importers to be very specific about the goods the need.  HAve specifications and samples available that you can send to potential suppliers for quote, and when there are goods such as metals and plastics that have different grades be very specific about the grade needed.

Part 1: Qualify your supplier

Part 2: Always Quality control your goods

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Going along on a topic I have covered quite a bit in the past, responsible sourcing, Ethical Corporation has written a painfully detailed article on Adidas’s recent supply chain woes and how they are handling them.

You may remember my post on their labor issues earlier this year, and as you will remember I have said that companies need to clean up or clean out, but through this article a twist is added… the factories in question are (according to Adidas) previously Reebok manufacturers, and that integrating their supply chains has been a difficult process to manage.

I suggest you read the article in full and then consider how the Adidas supply chain and the Reebok supply chain differ… and what was the source of the difference, and how did the difference impact their ability to work with/ manager their suppliers

Sound familiar to anyone?

It was about a year ago now that the first lead paint Barbies probably landed at Long Beach and began their un-QCed express lane to the Wal-Mart shelves… and since then, there has been a lot of debate about the role of brands in quanility control, and more than that, a lot of writing about how to control one’s supply base.

and it is hear that I will blend a few phrases that I have heard in my time on earth.. “cash is king”.. and “I’ll believe it when the money is in the bank”.. or “logistics is simply controlling frieght”..

Where these random cliches come together, is that I never consider a consulting deal closed until the money is in the bank, and that when sourcing in China I am only in the power position for as long as I control the money… and what amazes me is how many people forget these simple rules.

A while back I wrote a post about quality control I recieved an email from someone who had bought a container full of product that was crap.  It wasn’t to spec, he had fully paid out, and he wanted to know how to recover.  The problem was compounded by the fact that he had no other supplier ready in the wings, his current supplier knew that, and he feld stuck.

and he was… and there were two reasons for that.

1) He had not understood or planned for the risks associated with sourcing outside the U.S., and did not put in any fail safe measures

2) He assumed that his partner would get everything right, but failed to force his supplier to take on any risk – after all a 100% payment at shipment essentially is the best deal a manufacturer can get!

and here is what I told him

1) He needs to find a 2nd and 3rd supplier of goods as a backup

2) He should forget about returning the goods (the logistics of that alone was 6-8k USD with no indication the supplier would take it back)

3) He had to begin QCing the goods through either his own eyes, or trusted eyes

4) As long as his payment terms were as they were, his suppliers had no skin in the game and therefore there was no reason to believe this wouldn’t happen again.

For those who are sourcing in China, it really is important to understand that as long as you “owe” your supplier money, you are still in the position of power.  You can change an order size more easily, you can demand a 3rd party audit, and if the QC process shows a red flad you can return product much more easily.  Because until you are 100% paid up, the supplier at some level will be at a loss, and that is power.

In watching buyers in China for the last 5 years now, where I am often surprised is just how easily that is lost.  that the basic understanding of the power of money is lost on some who will structure their deal in such a way that they lose all ability to return items that are not up to spec.  That rather than quality control in China, and then have the ability to fix it on site, many will find themselves with a container full of junk that is unreturnable.

So, a couple quick lesson in global sourcing.  Make sure your goods are up to spec before they leave the country (because there is little you can do once they hit your dock), and never cash your supplier out until your final audit has been perform….

Make sure they have their skin in the game, and make sure you remain in a position of power.

Over the last couple of months, the economic news has been pretty bleak in the U.S. Talk of a recession, dropping consumer confidence, daily analysis on statistics showing the looming slowdown that is upon the U.S.

Going into Christmas, the news was particularly bad as you had a focus on product safety as well, and as a result a lot of retailers felt the pinch.

What is interesting is that if you just look at Wal-Mart, this was a good news bad news scenario, and depending on how you look at things… Walmart’s good news cycle will probably last longer than others, and defiantely longer than the bad news cycle.

Let me explain….

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“he believes holds the key to his fortune in China…” That is the end of the sentence started in Part 3 that is finished in Part 4.

so.. the entire statement “Peter has found a man he believes holds the key to his fortune in China..”… and boy oh boy does the next scene say it all (Run Peter RUN!!) .. this man (Cecil Pih) is going to steal your money.. and your product

According to Cecil.. “Doing business in China is like the wild wild west… except they know how to shot better than the cowboys” (By the way, Cecil moved into the lead on best quotes with that)..

Cut to Peter and Cecil describing their partnership and their strategy… starting with Shanghai on the whiteboard, and then moving from there through his “connections, clout, cash, and cultural understanding”

To close the deals .. you need wining, dining, and wenching (I am guessing he means going to KTV and saunas?) – Peter is up for the first two, but uses his age to get out of the third

Bank to Vance who has decided the adventure is something his 9 year old son should be witness to the fact that his partner is ripping Vance off (money, product, and even his land). Following his manager being roughed up, Vance decides to make a surprise visit… and it is clear from the minute he pulls into the driveway just where his money went (new Audi A6 … new office block fully kitted with panoramic windows and leather couches… and a new house with a swimming pool)

and so it is off to dinner where at the end of end of part 4, Vance’s bug fails..

Best Quote:
Cecil – “everything is hot. money is hot. food is hot. the girls are hot.. you really could use your shirt in the wild wild west”

Color Commentary:
Peter – Peter just jumped into a pool that is way beyond his depth. He now has a partner that has “connections to the right people”, says Shanghai is the hardest nut to crack in China, and is unable to pronounce many of the cities he will visit massage parlors in… yikes.. nice choice Peter, but I really think you would have been better off with Ms. Dai’s sister’s father in law.

Vance – I have a feeling Vance is going to force feed his partner over dinner. He has been outright ripped off, and product is not moving. While I am sure Vance knows better than to hit a man while his is down, he might just kick him cause it is easier. Note to Vance – next time you want to build a factory in China (close to wood forests), remember that 97% of all pine enters via the Russian border… not the DPRK. Go to Haierbin, Houhot, or Suifenhe

Tony – No update in part 4… I wonder how the new site manager is working out.

This series has yet to fail me. I am sure that in the end all three are going to come out of this richer than all get out simply because the stage is being set for Vance going to jail, Peter being kidnapped, and Tony crying in the corner of a half built factory. the warning bells could not get any louder, there are bogies in the perimeter, we are going to DEFCON 4.

See you in a few days for Part 5… Hopefully Tony will enter the picture cause I really want to see the factory.

Part 3 starts off with Peter pitching, and it comes out that he has failed to make a single sale after one month – Time to fish or cut bait for Peter. Cut to Tony who has set up a mansion of a store at the SNIEC Cushion Show in Shanghai. .. who is trying to figure out who wants to buy his cushions… or steal his patterns.

“If you want a quarter of a million cushions in 10 weeks, you will get your cushions in ten weeks”

Cut to Tony inspecting the site… which is uh.. way behind schedule. fortunately Tony’s business partner has a family member (her sister’s father in law) who can manage the job (That was convenient…). Tony is scared, and the entire staff goes to lunch at 11am.

Cut to Vance on the Huangpu river and a bit more background on his business. 100+ suppliers for 50,000 bathrooms (a large supply chain for a single person). So… of to the border of North Korea where Vance looks to set up his own operation, and he has a warehouse of equipment that he got on the cheap from bankruptcy auctions (this guy is a true vulture). This scene wraps with Vance driving on top of what should be the foundation of his new factory (he paid 2.7 million RMB for it) and I must say that he took it well. (so did his assistance who got ripped into)….

PArt 3 wraps up with Peter strutting through Shanghai’s Thames town, sitting down for a port, and putting on a strong face… man… I would be freaking at this point (not a single sale in site)

I can’t wait to part 4 … cause the last line was “Peter has found a man…”

Best Quote of the scene:
Vance – “I like to stay here one night (Shanghai). TO get me myself into the spirit and give me that kick up the ass. Look at it (Grand Hyatt) – If someone can build an 88 floor hotel, then why can’t I develop a new bath

Color commentary:
Vance is still going strong even with the fact that his foundation has yet to be poured (really… worse things could have happened).

Tony.. ah Tony. The sister’s father in law of your site manager? Are you kidding? Has it occurred to you to call someone at Jones Lange LaSalle or CM2Hill for help? BEsides having his product designs stolen by 21 year old mobile phone carriers… he has now put all his hopes of China based manufacturing into the hands of his site manager’s sister’s father in law.

Peter – Well, he has at least found himself in Shanghai, and has his feet on the ground. But I am worried given the last line was “he has met a man…”. Asking for a port, waiting for a man, and in his finest suit. I think my premonitions of a shady distributor are coming true.

Honestly, I could not get entertainment like this on satellite.  This series is priceless!  I t is like three blind mice for China.. and I just can’t wait to see how these guys stat putting it all together (at this point, I still think all have a legitimate shot… but no doubt there is more fun to come!)

Stay tuned for part 4… I think it is going to be better than the first 3.

Part 2 jumps straight into the action with Vance making an inspection of product. while Vance is a real A$#hole and I am not a fan of his attitude, I must say that it is clear that Vance’s experience in doing business in China has taught him that onsite inspections are the only way to go… and that when possible, one must buy a quarry to get things done right…

Following his purchase of a quarry, we ride along with a singing Vance through as he drives through toilet bowl city and tap fixture city to meet his man on the ground (Black Horse) who will apparently undercut anyone. This section is interesting is topped off when Vance feels a piece is too expensive and to bring the pricing down he strips the product down into pieces and then deconstructs the pricing piece by piece.. and saves 40%…

Before he leaves though, he gets Black Horse to copy a product sold in Europe, and explains how he (read others) get around IP – just gotta change it a little bit.

Cut to Peter in HK getting a hand mate suit and making his first pitch in his new suit.

Best quotes of the segment:
Vance (edited)- “The think I have cruised in off the banana boat that has just strolled out me 5 star hotel with a hangover. the last thing I want to be doing is strolling around the old dirty yard in my Armani suit and Gucci shoes”

Peter – “To be born British is to win the first prize in the lottery of life” – something I am sure all his customers would agree to..

Color Commentary:
A lack of moral fiber aside, Vance has all the makings for a successful buyer. While perhaps a bit rough around the edges, he takes no one at their word until he sees the product for himself, he waits the other side out, he looks at things closely, and in negotiations he bargains on individual product costs.

Peter on the other hand is in la la land and is probably going to have a tough time seeing his customer with his nose so high in the air. Risking everything at the age of 70 on a new product and new country with a trophy in hand just smells of disaster. At this point, I am betting he finds someone to partner with who is shady, and who he trusts wholly cause desperation will blind him from logic. It is still early in the game, but I am not holding high hopes for Peter

Part 3 on Friday