Editor's note: Looking for our online exclusive on when not to source overseas? Click here .
When Thad Hooker and his wife, Lisa, first took over Spirit of Asia , a Florida company selling high-end furniture and accessories, they, like many entrepreneurs, were unprepared for sourcing overseas. Unlike executives of large companies, the Hookers hadn't done a tour of duty overseas and didn't have retinues of assistants to help them when they bought Spirit of Asia in 2001. "I decided to source from Southeast Asia, but I had to find out everything myself," says Thad Hooker, 36, who had previously worked for a large insurance company. "It felt like a crapshoot."
So Hooker played catch-up--quickly. He exhaustively researched sourcing options before he ventured overseas, comparison-shopped source countries and did on-the-ground research himself. He was also lucky: On his initial trip to Chiang Mai, a city in northern Thailand, Hooker caught a ride with a local taxi driver who was interested in art and antiques. Hooker signed the man up, gave him a digital camera, and now employs the former driver as a furniture scout on the ground. Today, Hooker has a profitable shop in Fort Lauderdale, is considering opening other locations and has launched a website to sell his products nationwide.
As margins have shrunk in most industries, entrepreneurs have had to look overseas to survive. Small companies are increasingly sourcing directly, rather than using middlemen: Hooker saves as much as 60 percent by buying items directly in Asia instead of using a broker.
While there is a wide range of source countries to choose from, a handful are the hottest. China is now the biggest recipient of foreign investment in the world, particularly for labor-intensive products. "You can always produce cheaper in China," says Jennifer Adams, CEO of Velocity Source Group International , a consulting firm in Oakland, California, that helps entrepreneurs find factories in Asia.
Other Asian nations, such as Thailand, rival China's cheap labor with better legal systems, says Chris Runckel, president of Runckel & Associates , a Portland, Oregon, consulting firm. And Eastern Europe is a hot spot for higher-value items. It boasts highly educated work forces that are cheaper than those in Western nations.
Once you've decided to source overseas, you must figure out exactly what you can spend in order to make a profit. Adams suggests that entrepreneurs study all parts of their manufacturing to understand which parts are the most labor-intensive and could be outsourced.
The initial search for overseas sources starts with abandoning preconceptions about countries, says Mike Lord, director of the Flow Institute for International Business at Wake Forest University in Winston-Salem, North Carolina. "You can't assume things will be comparable to America," says Lord. "You can't even assume that all parts of a country will be the same."
Runckel adds, "You can't expect any degree of legal protection [in foreign countries]."
Your research must include learning about the local customs and culture of the countries you're considering, says Laurel Delaney, president of GlobeTrade.com, a Chicago firm that helps businesses source and sell overseas. Adams adds that being blustery, a typical American negotiating strategy, rarely works in Asia, where quiet diplomacy is usually the best way to seal a deal.
Working with a consultant who can compare the strengths and weaknesses of countries and set up appointments overseas before you fly is a good first step in your search. Local trade organizations and chambers of commerce often offer assessments of consultants.
Some entrepreneurs shun consultants, preferring to use online marketplaces, but these can be risky. Michael Zey , professor of management at Montclair State University in Montclair, New Jersey, says: "If you go to the net and put in 'sourcing to China,' you'll get a slew of companies purporting to help you through the barriers. The question is, How do you know if they're good?"
Thad Hooker knows the danger of relying too much on the internet. "I did a lot of internet research before a trip to Vietnam," he says. "But when I got there, I found the people I'd contacted tended to be [middlemen], not direct contacts with factories or artists."
Some smaller companies planning to source extensively hire an executive who has overseas experience with a larger company, even if the executive's work was not in the country from which the company is sourcing. "If [the executive] has had experience in another developing country, even Mexico, those soft skills and experience--dealing with red tape and corruption--are transferable," says Runckel.
Whether working with a consultant or handling sourcing yourself, you should also examine industry research on suppliers through organizations like the Federation of International Trade Associations and trade groups specific to your industry. Also look into U.S. government assistance programs. FITA has comprehensive business directories on many source countries, while the Export-Import Bank now offers larger capital loans for small global traders. The U.S. Commercial Service's Gold Key Matching Service introduces entrepreneurs to U.S. embassy officials overseas, who then introduce Americans to local suppliers.
Making Your Move
If you've been briefed on foreign cultures, know what you're looking for and are stocked with in-flight reading, you're ready to hire a supplier. At this point, remember a few crucial keys for success:
1. Hire a source that's not a competitor. It's best to find a supplier whose own business does not directly compete with yours and who isn't tempted to rip you off. Intellectual-property protection can be a major problem in Asia. Robert Kushner, 38, president of Pacific China Industries , a novelty manufacturer with 20 employees, mostly based in Hong Kong, knows the drill. He recently outsourced a product to a factory in China, and the samples came to him with a design flaw. "The factory [told] me, 'We know how to fix the flaw.' Why? Because they'd already knocked off my item and were selling it themselves," says Kushner.
To protect himself, Kushner now insists on having his own inspector inside Chinese factories. For valuable items, he spreads the product components across numerous factories so no one supplier has the prototype for the entire piece. His most trusted supplier does the assembly.
Other smart entrepreneurs, Runckel notes, insist on a nondisclosure agreement before they contract with a source, or they try to patent the item in the source country itself. That way, if a supplier rips them off, it is vulnerable under local law. Hooker obtained an official importer certification from Thailand, which could help him curry favor with the Thai government if he runs into any of these problems.
2. Determine a source's turnaround time. For many entrepreneurs, finding a source that can move quickly is critical. Three years ago, Mia Abbruzzese, 39, left her job as an executive for a major shoe company to start her own shoe business, Boston-based Morgan & Milo . She's learned an important lesson along the way: When you have a small company, you don't have as much power with factories as a large company operating its own factory does. "I can't dictate to my factories--being smaller, you don't have that kind of control," says Abbruzzese. "So if I can find someone who can do it quickly, I can succeed."
3. Give your source an exact model of what you want produced. "It's always better to cost something from an actual item rather than an idea of an item," says Adams. You can obtain a form called an ATA Carnet from the U.S. government that lets you import commercial samples duty-free.
Finding someone who will accept an irrevocable letter of credit--a promise by a bank to pay the source--is also important, Runckel says, because this adds a bank's oversight to the process. In addition to letters of credit, other types of financing include a bill of exchange, which is essentially a check. Of course, like a personal check, a bill of exchange has a higher risk of fraud. Some entrepreneurs, like Hooker, prefer to use cash for smaller orders because they get better deals from sources that way.
Logistics is another area that can perplex entrepreneurs. "Don't assume that your source understands transport; you have to manage it yourself," says Runckel. He suggests finding a top-quality freight forwarder who has worked with first-time importers. The freight forwarder can assist you with all elements of cargo, including negotiating the documents needed to move containers, such as bills of lading, which are the contracts between the source, the shipping company and the buyer.
Once you've chosen a supplier, you're ready to source. Constant communication is a must. "It's super-important to show your face [in the source country]," says Adams. She suggests being in e-mail or phone contact with your suppliers at least once a day.
Typically, your first contracts will be on a per-project basis. Eventually, the relationship can evolve to longer-term contracts, which help insulate entrepreneurs from potential currency fluctuations. Successful entrepreneurs give a steady stream of business to sources they like. "Showing the factory you can capture a lot of orders shows you have a future," says Kushner. "Sometimes you take an order that doesn't make you much money to keep your volume up."
Eventually, something might go wrong. Even the most successful entrepreneurs can have trouble overseas. Sometimes the trouble starts at home. Hooker knows. "Last summer, I shipped a container of Thai triangle-shaped pillows [to the United States]. We brought them in, no problem, at customs," he says. The furniture store that the pillows went to was displaying them in its showroom when someone from the Department of Agriculture saw them. "Turns out, inside these pillows [was] rice straw," says Hooker. Rice straw is banned in the United States. "They impounded all those pillows. We had to give a credit for [them]. It definitely hurt us." Hooker learned his lesson. These days, he studies U.S. customs information so scrupulously that other companies turn to him for advice: He now sources for larger furniture companies, who rely on his Asian expertise. While that may be more than you want to do, putting in some time and effort will make you a foreign expert in your own right.
When Not to Source
The frenzy over sourcing overseas sometimes draws in entrepreneurs who would be better off not buying a plane ticket. Mike Lord, director of the Flow Institute for International Business at Wake Forest University in Winston-Salem, North Carolina, says that before making a move, entrepreneurs should seriously analyze whether they will save money by sourcing abroad.
"Many companies are convinced they have to go to China, but they don't understand that the downsides to moving [production] can outweigh the lower labor costs," he says.
Certain types of businesses are the best prospects for staying in the United States. According to U.S. China Business Solutions, a consulting firm specializing in helping U.S. companies source in China, it doesn't make sense for small and midsize companies to source in China if their initial order will be less than $200,000, given the upfront costs of hiring an agent, setting up shipping, obtaining samples, and making trips to the source country.
Companies that require a high degree of intellectual-property protection might also consider staying close to home. And higher-value items America. "If you're in a business where you make magnetic resonance imaging, and people can't wait weeks for a part to come from China, maybe it doesn't make sense," says Lord. "If you source, you'll have to build up an inventory here, in a warehouse in the U.S., so the item is always available. That could be more expensive than just making it here."
Here are some resources to help you get started sourcing product overseas:
Federation of International Trade Associations : The Federation of International Trade Associations offers a comprehensive schedule of trade events and conferences, a directory of trade leads from across the globe, an enormous database of other trade-related websites in numerous countries, and meeting boards on which entrepreneurs can find factories overseas.
GlobeTrade.com : GlobeTrade.com is a leading consulting firm for exporters and importers, and a clearinghouse on sourcing products overseas.
Small Business Exporters Association : Part of the National Small Business Association, the SBEA brings together smaller companies with an interest in exporting or participating in global supply chains. The organization also maintains databases of overseas trade leads, offers access to export financing, and helps you prepare applications for government financing for export projects.
Stat-USA : Stat-USA is an excellent clearinghouse of economic and financial data about all foreign countries as well as market analysis of key foreign nations.
U.S. Commercial Service Gold Key Matching Service : Click on "Export Assistant Services." This program arranges pre-screened interviews with potential business partners, agents and distributors in foreign nations. Gold Key also provides market research about various countries and can arrange transportation and translation services for meetings with potential sources.
U.S. Export Assistance Centers : Located in larger U.S. cities, the Commerce Department's Export Assistance Centers provide counseling for businesses considering exporting or importing. They can also inform entrepreneurs about how to obtain the correct documentation for exporting and importing, how to find shippers and other vital details.
Joshua Kurlantzick is a writer in Washington, DC.