Supply Chain Solutions No.20 – Chinese Trading Companies Vs Manufacturers
Amongst experienced sourcing professionals, there is always a stigma about using a Chinese Trading Company, with the preference been to go directly to the source manufacturing unit. Going directly to the source, for the most part, is the best way to go, but there are situations where a Trading Company can add value to your businesses operation.
Not all Trading Operations are created equal, here are some of the benefits of using a Trading Company over a Manufacturing Company;
- Smaller manufacturers do not have the right to deal in foreign currency, have an export license and the facility to manage the VAT refund.
- Larger Trading companies may have better relations with the local government, and through quantity of scale for all exports combined can gain preferential treatment and a faster VAT refund. While there has been a lot of reform in the area of VAT refunds, it can remain a cash flow negative to smaller enterprises.
- Certain Trading Companies are specialists in particular commodity giving them substantial volume in their purchasing ability in that commodity thus allowing strong relationships with manufacturers and buying power that is reflected in pricing.
- Some Trading Companies own manufacturing units; the Trading Company is the sales vehicle for the operation.
- If you are a smaller organisation with multiple products categories, trading companies can become your regional hub, consolidating invoices, reduce transactional and logistic costs at origin and destination.
- Buying organisation that do not develop and rely on a buying selection, Trading Companies are a great source of variety in product categories and continually providing a range of innovation.
- Larger Trading Companies have a better balance sheet or relationships with banks to be able to finance your business.
- Extensive range of regional experience and relationships from raw material to finished goods manufacturing.
While there are positives, there are also negatives, here are a few;
- Limited visibility to downstream vendors, the Trading Company may give your production to the cheapest source to maximise profit without going through a process of developing a supplier to achieve standards required.
- Trading Companies subcontract to other Trading Companies in other regions; your order could be outsourced through several companies who get a slice limiting transparency, control and quality.
- Where the trading company manages multiple categories, they may not have the expertise necessary to achieve the desired quality.
- The individual trader you are working with doesn’t have the skills and relationships to control your business, or they have so much business they do not have the time to devote to your business.
My preference is to work directly with specialist manufacturers but do realise that Trading Companies do have advantages especially if they own manufacturing unit or if they offer raw material or product innovation.
Work with trading companies that are specialists in their field or clearly have multiple trading division that are experts. Ensure transparency, do your due diligence on downstream vendors, know where your product will be manufactured; production and quality will be managed to the level of your business. Ensure the individual you are working with is an expert with several years’ category experience and can control your need.
ID Global Concepts are experts in supply chain management. We add value to your supply chain through consultancy or management contract to ensure the business has the best practice systems that are the right fit for your business, customer and meet your value expectations.