You Can Make It Anywhere
Here's the info you need to source your product overseas and keep it from being lost in translation.
When Thad Hooker and his wife, Lisa, first took over Spirit ofAsia, a Florida company selling high-end furniture andaccessories, they, like many entrepreneurs, were unprepared forsourcing overseas. Unlike executives of large companies, theHookers hadn't done a tour of duty overseas and didn't haveretinues of assistants to help them when they bought Spirit of Asiain 2001. "I decided to source from Southeast Asia, but I hadto find out everything myself," says Thad Hooker, 36, who hadpreviously worked for a large insurance company. "It felt likea crapshoot."
So Hooker played catch-up--quickly. He exhaustively researchedsourcing options before he ventured overseas, comparison-shoppedsource countries and did on-the-ground research himself. He wasalso lucky: On his initial trip to Chiang Mai, a city in northernThailand, Hooker caught a ride with a local taxi driver who wasinterested in art and antiques. Hooker signed the man up, gave hima digital camera, and now employs the former driver as a furniturescout on the ground. Today, Hooker has a profitable shop in FortLauderdale, is considering opening other locations and has launcheda website to sell his products nationwide.
As margins have shrunk in most industries, entrepreneurs havehad to look overseas to survive. Small companies are increasinglysourcing directly, rather than using middlemen: Hooker saves asmuch as 60 percent by buying items directly in Asia instead ofusing 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 offoreign investment in the world, particularly for labor-intensiveproducts. "You can always produce cheaper in China," saysJennifer Adams, CEO of Velocity Source Group International, aconsulting firm in Oakland, California, that helps entrepreneursfind factories in Asia.
Other Asian nations, such as Thailand, rival China's cheaplabor with better legal systems, says Chris Runckel, president ofRunckel& Associates, a Portland, Oregon, consulting firm. AndEastern Europe is a hot spot for higher-value items. It boastshighly educated work forces that are cheaper than those in Westernnations.
Once you've decided to source overseas, you must figure outexactly what you can spend in order to make a profit. Adamssuggests that entrepreneurs study all parts of their manufacturingto understand which parts are the most labor-intensive and could beoutsourced.
The initial search for overseas sources starts with abandoningpreconceptions about countries, says Mike Lord, director of theFlowInstitute for International Business at Wake Forest Universityin Winston-Salem, North Carolina. "You can't assume thingswill be comparable to America," says Lord. "You can'teven assume that all parts of a country will be the same."
Runckel adds, "You can't expect any degree of legalprotection [in foreign countries]."
Your research must include learning about the local customs andculture of the countries you're considering, says LaurelDelaney, president of GlobeTrade.com, a Chicago firm that helpsbusinesses source and sell overseas. Adams adds that beingblustery, a typical American negotiating strategy, rarely works inAsia, where quiet diplomacy is usually the best way to seal adeal.
Working with a consultant who can compare the strengths andweaknesses of countries and set up appointments overseas before youfly is a good first step in your search. Local trade organizationsand chambers of commerce often offer assessments ofconsultants.
Some entrepreneurs shun consultants, preferring to use onlinemarketplaces, but these can be risky. Michael Zey, professor of management atMontclair State University in Montclair, New Jersey, says: "Ifyou go to the net and put in 'sourcing to China,'you'll get a slew of companies purporting to help you throughthe barriers. The question is, How do you know if they'regood?"
Thad Hooker knows the danger of relying too much on theinternet. "I did a lot of internet research before a trip toVietnam," he says. "But when I got there, I found thepeople I'd contacted tended to be [middlemen], not directcontacts with factories or artists."
Some smaller companies planning to source extensively hire anexecutive who has overseas experience with a larger company, evenif the executive's work was not in the country from which thecompany is sourcing. "If [the executive] has had experience inanother developing country, even Mexico, those soft skills andexperience--dealing with red tape and corruption--aretransferable," says Runckel.
Whether working with a consultant or handling sourcing yourself,you should also examine industry research on suppliers throughorganizations like the Federation of International TradeAssociations and trade groups specific to your industry. Also lookinto U.S. government assistance programs. FITA has comprehensivebusiness directories on many source countries, while theExport-Import Bank now offers larger capital loans for small globaltraders. The U.S. Commercial Service's Gold Key MatchingService introduces entrepreneurs to U.S. embassy officialsoverseas, who then introduce Americans to local suppliers.
Making Your Move
If you've been briefed on foreign cultures, know whatyou're looking for and are stocked with in-flight reading,you're ready to hire a supplier. At this point, remember a fewcrucial keys for success:
1. Hire a source that's not a competitor. It'sbest to find a supplier whose own business does not directlycompete 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 noveltymanufacturer with 20 employees, mostly based in Hong Kong, knowsthe 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? Becausethey'd already knocked off my item and were selling itthemselves," says Kushner.
To protect himself, Kushner now insists on having his owninspector inside Chinese factories. For valuable items, he spreadsthe product components across numerous factories so no one supplierhas the prototype for the entire piece. His most trusted supplierdoes the assembly.
Other smart entrepreneurs, Runckel notes, insist on anondisclosure agreement before they contract with a source, or theytry to patent the item in the source country itself. That way, if asupplier rips them off, it is vulnerable under local law. Hookerobtained an official importer certification from Thailand, whichcould help him curry favor with the Thai government if he runs intoany of these problems.
2. Determine a source's turnaround time. For manyentrepreneurs, finding a source that can move quickly is critical.Three years ago, Mia Abbruzzese, 39, left her job as an executivefor a major shoe company to start her own shoe business,Boston-based Morgan & Milo. She's learned an importantlesson along the way: When you have a small company, you don'thave as much power with factories as a large company operating itsown factory does. "I can't dictate to my factories--beingsmaller, you don't have that kind of control," saysAbbruzzese. "So if I can find someone who can do it quickly, Ican succeed."
3. Give your source an exact model of what you wantproduced. "It's always better to cost something froman actual item rather than an idea of an item," says Adams.You can obtain a form called an ATA Carnet from the U.S. governmentthat lets you import commercial samples duty-free.
Finding someone who will accept an irrevocable letter ofcredit--a promise by a bank to pay the source--is also important,Runckel says, because this adds a bank's oversight to theprocess. In addition to letters of credit, other types of financinginclude a bill of exchange, which is essentially a check. Ofcourse, like a personal check, a bill of exchange has a higher riskof fraud. Some entrepreneurs, like Hooker, prefer to use cash forsmaller orders because they get better deals from sources thatway.
Logistics is another area that can perplex entrepreneurs."Don't assume that your source understands transport; youhave to manage it yourself," says Runckel. He suggests findinga top-quality freight forwarder who has worked with first-timeimporters. The freight forwarder can assist you with all elementsof cargo, including negotiating the documents needed to movecontainers, such as bills of lading, which are the contractsbetween 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 toshow your face [in the source country]," says Adams. Shesuggests being in e-mail or phone contact with your suppliers atleast 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 currencyfluctuations. Successful entrepreneurs give a steady stream ofbusiness to sources they like. "Showing the factory you cancapture a lot of orders shows you have a future," saysKushner. "Sometimes you take an order that doesn't makeyou much money to keep your volume up."
Eventually, something might go wrong. Even the most successfulentrepreneurs can have trouble overseas. Sometimes the troublestarts at home. Hooker knows. "Last summer, I shipped acontainer of Thai triangle-shaped pillows [to the United States].We brought them in, no problem, at customs," he says. Thefurniture store that the pillows went to was displaying them in itsshowroom when someone from the Department of Agriculture saw them."Turns out, inside these pillows [was] rice straw," saysHooker. Rice straw is banned in the United States. "Theyimpounded all those pillows. We had to give a credit for [them]. Itdefinitely hurt us." Hooker learned his lesson. These days, hestudies U.S. customs information so scrupulously that othercompanies turn to him for advice: He now sources for largerfurniture companies, who rely on his Asian expertise. While thatmay be more than you want to do, putting in some time and effortwill make you a foreign expert in your own right.
When Not to Source
The frenzy over sourcing overseas sometimes draws inentrepreneurs who would be better off not buying a plane ticket.Mike Lord, director of the Flow Institute for InternationalBusiness at Wake Forest University in Winston-Salem, NorthCarolina, says that before making a move, entrepreneurs shouldseriously analyze whether they will save money by sourcingabroad.
"Many companies are convinced they have to go to China, butthey 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 stayingin the United States. According to U.S. China Business Solutions, aconsulting firm specializing in helping U.S. companies source inChina, it doesn't make sense for small and midsize companies tosource 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-propertyprotection might also consider staying close to home. Andhigher-value items America. "If you're in a business whereyou make magnetic resonance imaging, and people can't waitweeks for a part to come from China, maybe it doesn't makesense," says Lord. "If you source, you'll have tobuild up an inventory here, in a warehouse in the U.S., so the itemis always available. That could be more expensive than just makingit here."
Where to Turn
Here are some resources to help you get started sourcing productoverseas:
Federation ofInternational Trade Associations: The Federation ofInternational Trade Associations offers a comprehensive schedule oftrade events and conferences, a directory of trade leads fromacross the globe, an enormous database of other trade-relatedwebsites in numerous countries, and meeting boards on whichentrepreneurs can find factories overseas.
GlobeTrade.com: GlobeTrade.com is a leadingconsulting firm for exporters and importers, and a clearinghouse onsourcing products overseas.
Small BusinessExporters Association: Part of the National Small BusinessAssociation, the SBEA brings together smaller companies with aninterest in exporting or participating in global supply chains. Theorganization also maintains databases of overseas trade leads,offers access to export financing, and helps you prepareapplications for government financing for export projects.
Stat-USA: Stat-USA is an excellent clearinghouseof economic and financial data about all foreign countries as wellas market analysis of key foreign nations.
U.S. Commercial Service Gold Key Matching Service:Click on "Export Assistant Services." This programarranges pre-screened interviews with potential business partners,agents and distributors in foreign nations. Gold Key also providesmarket research about various countries and can arrangetransportation and translation services for meetings with potentialsources.
U.S. Export Assistance Centers: Located in largerU.S. cities, the Commerce Department's Export AssistanceCenters provide counseling for businesses considering exporting orimporting. They can also inform entrepreneurs about how to obtainthe correct documentation for exporting and importing, how to findshippers and other vital details.
Joshua Kurlantzick is a writer in Washington, DC.
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