CHAPTER 8
Sourcing suppliers and manufacturing
During the 1900s, and certainly up to the 1980s, there was a strong drive towards local, or ‘sovereign’, manufacturing driven by Australia's determination to become an independent and self-sufficient nation. And developing nations were just that — developing.
Over the past 40 years, however, there has been a continuing trend to seek lower cost manufacturing overseas as those developing nations started to mature and stabilise, and with large populations of very low cost labour available they could develop a manufacturing base that provided a significant cost advantage over local manufacturing. As a result, we saw numerous industry sectors heading overseas for supply.
Over the past 20 years, though, we have been confronted with scenes of manufacturing ‘sweat shops’ — utilising what we would deem slave labour — that deeply shocked the general community. This in itself has resulted in a manufacturing movement by companies towards ethically sourced products in response to market demand. Not all products can be sourced and manufactured successfully, whether it be in Australia or other developed nations; however, effort can be put into ensuring our values and quality control processes are maintained within those supply chains in other countries.
The COVID-19 pandemic raised other critical issues with overseas supply due to volatile movements in demand and populations being locked down. This saw a huge reduction in available supply from manufacturers together with international freight channels being heavily restricted and quarantine measures being put in place. As a result, both lead times for stock and costs went through the roof causing major supply, pricing and cash-flow issues for companies.
So you need to make a decision on where to source your products from. Do you look overseas and question whether supply will return to something like ‘normal’ in the near future, or do you start the process of looking for faster, more reliable local manufacturers? Having dealt with both, I've seen the pros and cons of each and I'll share some of them with you now.
Local sourcing
It's certainly an advantage to share the same culture with a business partner when you're negotiating and managing expectations, particularly for new business owners who haven't had the experience of dealing with other cultures. Detailed information being lost in translation is a real issue so it's important to put in place systems to ensure expectations are met and negotiations are understood.
Sourcing locally supports local jobs and, in turn, the local economy, and should provide fast access to the finished product by avoiding international supply chains and potentially volatile cost rises in freight, particularly if you're relying on shipping channels. (The cost of booking shipping containers rose by a factor of 10 in 2021, causing major cost issues in relation to landed freight.) You're also not subject to geopolitical issues, which could interrupt your supply chain and export access to a major customer market, as we've seen in recent times in Australia. And you'll want to make sure your local manufacturers aren't reliant on overseas supply for components either.
Energy costs (from the rapid rollout of renewables), together with manufacturing automation and other input costs, have been coming down in Australia while overseas manufacturing has seen many cost increases so the disparity in costs are certainly not what they used to be.
I would strongly recommend you do your research and look for a local manufacturing partner in the first instance, if that opportunity exists for you. There's certainly a shift in consumer sentiment that can be brought into your marketing plan to reflect your local sourcing strategy, a low emissions supply chain and the local partnerships you form to benefit the home economy.
International sourcing
If you still feel an overseas supplier is the best source for your product supply, then here are a few of my tips for finding the right one.
Firstly, how do you find them? In days gone by you simply had no choice but to get over to those countries, visit the factories, see who had the capabilities and do your best on the negotiations. Over time, you'd invest in building a relationship that worked and was trusted, which also created significant value in your business.
These days finding potential suppliers is much easier with search engines such as Alibaba, AliExpress, Global Sources and many others. However, there is still the issue of understanding their capabilities and where they sit in the market.
If you look for a supplier on Alibaba, for instance, chances are 10 suppliers of a product will show up. They usually all look similar and they even share the same images in many cases, which makes things really confusing! Are they all the manufacturer of the product? The short answer is ‘no’. What you'll find is many agents of the one manufacturer representing themselves as the manufacturer and all taking a margin reselling the same thing. So you need to ask them some very direct questions about their manufacturing capabilities, ability to modify the product and minimum order quantities. In order to understand who is the real manufacturer, ultimately you may have to get on a plane and do your own due diligence by seeing first-hand who they are and their capabilities.
Before you go to that expense, it's certainly worthwhile testing product samples from various suppliers. Test their ability to manufacture your product without giving away too much of the final design, or alter their standard product to encompass some of your specifications, and test their ability to manufacture under your brand. Make sure you have an NDA in place, or better still a trademark or provisional patent over your brand and technology if relevant. Good ideas will quickly be copied in other countries if they're not properly protected or at least represented to the supplier as having protection in place.
When communicating with them, it's a good idea to spend time reinforcing your longer term manufacturing partnership objectives because they will see your order of samples as simply another order, not as a way of testing out their capabilities. Once you start to home in on who you deem to be the right manufacturer, you really need to then focus on developing your relationship. International suppliers value a personal visit highly as it demonstrates your willingness to work with them. They will want to take you on a factory tour and show off all their capabilities. Make sure you go out for dinner and a celebratory drink as this is also valued highly and builds on the personal relationship and mutual respect of both businesses.
I clearly remember searching for my first solar panel manufacturer, and after sourcing a German manufacturer for the critically important electronics within the ZEN inverters, I found a high-quality Asian manufacturer for the panels primarily to provide a shorter lead time into Australia for what was going to be a high-volume line. There were no manufacturing options in Australia with the capability we were after. I found a company that I was reasonably confident in. They had started the same year we started and at that time had just one manual production line, but they were very proud of their quality and processes.
We were all bluff and bravado at the time, as you need to be when starting a company, and represented ourselves as the next big thing in the emerging renewables sector in Australia. Even though we barely had a business, we did have a solid business plan and brand. When we arrived at the company's offices in Taizhou, China, the entire staff was out the front singing the company song! We couldn't believe our eyes (or ears) and wondered how we would pull this off! It turned out my wife and I unknowingly had a powerful weapon with us: our three-month-old baby girl. Little did we know that our little girl from Australia would be a symbol of good fortune. Everyone wanted to admire and have their photo taken with her, including the CEO and chairman, which immediately opened the doors to a very fruitful and entertaining relationship.
We had dinner together each night we were there, and we ate and drank far too much, with many rounds of ‘Cheers’ — or ‘Gānbēi’, as they say in China, which literally means ‘dry cup’ — and, unlike in the West, you're expected to empty your glass after each toast, or at least give it your best shot! No-one was in the best of form the next morning, but at that time it was essential to build a strong relationship with trust and a deeper understanding of each other's needs.
We toured the factory and the manufacturing facility to see examples of finished products and discuss quality expectations, finishes, packaging and branding options. Our visit also provided the opportunity to talk about quality control processes, continuous improvement cycles and how they proposed to protect our brand and other intellectual property.
Warranties
A discussion needs to be had early on around defective products and how warranties will be managed. Culturally these can be seen differently, and you have to meet your obligations to your own country's legal requirements and also to your own company's promise to your customers.
It's difficult and expensive to send faulty products back to an overseas supplier. A clear process has to be negotiated detailing, for example, what information and images the manufacturer will accept as proof of a faulty product so that you can replace the goods from your local stock holding and service the customer immediately without tedious delays. The same goes if a full refund is required: a credit against the supplier's account must be a trusted and acknowledged process. This can quickly become an area of tension if it's not clearly negotiated upfront.
Minimum order quantities (MOQs)
Another challenging area in dealing with overseas supply is negotiating minimum order quantities (MOQs). In my experience, a new supplier will always push for container quantities or at least significant volumes upfront as the MOQ, which causes a lot of stress for a start-up or early-stage business. This, of course, works best for the supplier and is a great excuse to force a large order onto a naive customer. However, from your point of view there's huge risk in undertaking an order of that size — which could be in the tens of thousands or even hundreds of thousands of dollars in value — first up.
My advice is, quite simply, Don't do it! Bring in the bluff. Let them know you're building a large business, you need to test their capability to supply and the quality of their product and packaging over a series of much smaller orders at the best price, and that you'll eventually get to the order size they want. What you are really doing is creating the opportunity to take smaller quantities, and hopefully pre-selling or selling them quickly to build cash flow and profits, enabling you to buy a slightly larger quantity next time and to keep your word. Building a business is a two-way street of ‘give and take’ with suppliers. They will be relentless in trying to force you into taking larger quantities quickly. But keep to your plan and push them hard on the smaller quantities to build your business in manageable steps.
Freight forwarding
To arrange air or sea freight of your commercial product into your country you'll need to engage a freight forwarder, who will arrange collection of the goods from the factory, load them onto the vessel, and organise the shipping and customs paperwork — including the ‘bill of lading’, which is generally the trigger for payment. When dealing with overseas suppliers you'll be expected to pay upfront for your goods when the ship is loaded. This means you won't have goods to sell or cash flow while the shipment is in transit, so make sure you work this into your budget. This is a major implication when dealing with overseas suppliers, particularly when dealing with European suppliers, because stock may be on the water for six weeks or more.
The freight forwarder will also manage customs and tax paperwork when the goods enter the country of destination. At this point, you'll have to pay the GST (or sales tax) upfront before you collect it on sales, which can also contribute to a significant negative cash flow.
Account terms
In time, once your relationship with the supplier has settled and trust is flowing both ways, the conversation can turn to account terms, where your aim should initially be to negate the time the stock is on the water.
Depending on the country of the manufacturer, they will sometimes negotiate credit insurance under arrangement or backing by the government, or separately negotiate terms with their bank that they can pass on to you.
If supply is out of Asia, start by trying to negotiate 30 days from bill of lading, or if supply is out of Europe or the United States, try to negotiate 60 days from bill of lading. It made an incredible difference to our company shifting a good part of the risk back to the supplier, and gave us leverage to push for even better pricing to grow the market faster so we both benefited from the arrangements.
Shipping times and delays
Generally, shipping times from Asia are two to three weeks to Australia, depending on which ports are involved. From the United States it's between four and six weeks and from Europe it can be more than six weeks. Talk to your freight forwarder about the route to be taken and whether there will be ‘cross-docking’, where your shipment may change ships at a port such as Singapore, which happens at certain times of the year. In the first six months of the year this may not affect transit times much at all and may provide more flexibility to access vessels. However, in the six months leading up to Christmas, when shipping lanes are congested, I've had experiences where a shipment can literally sit on a cross-dock for three weeks waiting to be collected, causing untold dramas for customers waiting for their stock.
During these times of the year, it's worth trying to negotiate a direct shipment without cross-docking to have a much better chance of deliveries arriving on time, even if it costs a bit more for the convenience.
Drop shipping
A relatively new alternative to managing stock has been the evolution of drop shipping, where your customers’ orders are fed directly through to the manufacturer or their warehouse online for direct dispatch to the customer. You are surrendering some control over your business but gaining a number of advantages including a positive cash flow, because you're being paid immediately on a professional payment platform before the shipment has even been made, and you have professional warehousing for live stock control and immediate dispatch, including full tracking services. This is a great solution for centralised global shipping but delivery could take a while compared to local services, particularly during a pandemic, and express options can be costly on small quantities internationally.
Services such as Amazon, and other online marketplaces, including industry-specific options now evolving, have grown extensively on the back of drop shipping, enabling online retailers to set up their stores on the Amazon platform and benefit from its entire suite of integrated backend logistics services.