FAQ

China Potential Savings

• How much can I expect to save by moving production to China?
• What about tooling charges or mold set up fees?
• Can the Chinese tooling be transferred to the USA?

PassageMaker Services and Pricing

• Is PassageMaker a trading company?
• Does PassageMaker receive a commission from suppliers?
• Is PassageMaker worried it will be cut out of the supply chain if buyers deal directly with sellers?
• How can PassageMaker be of assistance if I already have a supply chain in China?
• Why should I disclose my target price to PassageMaker during the supplier identification research?
• What should I know when comparing PassageMaker’s service fees for Assembly/Inspection and Vendor Coordination to other companies?
• Why pay PassageMaker for a feasibility study ⁄ sub-supplier identification research when I can find my own suppliers online or use a trading company that doesn’t charge for this research?
• How are potential suppliers identified?

Value Added Tax

• What is VAT and why should I worry about it?

Corporate Social Responsibility

• Are concerns over “sweatshop labor” and environmental protection addressed?

Intellectual Property Rights (IPR)

• How to ensure that blueprints, tooling, and brand names are protected?

Order Sizes, Samples etc.

• What is the order size of a typical PassageMaker client?
• Are there minimum order sizes?
• How many samples should I send?
• Do I need the Chinese address to mail things to PassageMaker?

QC -Quality Control

• What are some of key terms and concepts I need to understand regarding Quality Control in China?

Visiting China

• Will I need to visit China to supervise my project?
• Can PM help me visit factories in China?

China Potential Savings

How much can I expect to save by moving production to China?

There is no set formula but there are general rules that apply. Labor intensive products made of readily available materials offer the greatest savings. Products with specialized materials which need to be imported into China may not encounter larger price reductions by moving overseas. Other major issues to consider are shipping and duties. PassageMaker looks at the total supply chain, door to door, to ensure savings are achieved.

In one instance we reduced the cost of a complex toy from $122 to $18!

>What about tooling charges or mold set up fees?

Generally speaking, you can expect tooling for production runs in China to cost 1/3 to 1/2 as much as in the US or Europe. Expect savings in the 25% – 40% range on tooling built for production runs in N. America or the EU. (The differences in tooling for domestic use and tooling for export are explained in the next FAQ below. Generally, the more expensive the tooling back home, the greater the savings that can be expected in China.

During the Request for Quotation (RFQ) phase, it is essential to pay close attention to the tooling costs in addition to the unit price. It is not uncommon for “tooling hustlers” to give a great unit price to get your business, only to find out later that the tooling cost has been inflated. Proper research will identify not only the best unit price at a national level, but also what is the going rate on the required tooling.
Many parameters can affect the price of the given tool & die or mold. Take plastic injection mold tooling for example. Chief among these parameters are:

• Required tool life
• Number of cavities
• Core and cavity insert material
• Complexity of the product
• Product size
• Tolerances
• Runner system

Can the Chinese tooling be transferred to the USA (or other non-China locations)?

Tooling that has been built for production in China is generally not intended for export at a later time. The foremost reason for this is that the tooling would not have been initially designed for use on the customers’ injection equipment and the tooling may not even fit. Also very important is the fact that the tooling will not have been built to Export standards. Many of the replacement parts (ejector pins, etc.) may not be standard size and would have to be custom manufactured. Lower cost (and softer) Chinese materials may have been used in construction, reducing the life of the tool.
Hose connections may not mate with your overseas machinery and inlets/outlets, if marked at all, may be written in Chinese. If the customer has any future plans to move the tooling to the US at some later date, it is very important to specify that in the beginning before production begins. Please visit our Tooling and mold making page for more details.

PassageMaker Services & Pricing

Is PassageMaker a trading company?

Absolutely not. PassageMaker is not a middleman, factory representative or trading company. Our interest is aligned with the client. We serve as an advisor to identify and manage the most qualified supplier at a national level in China. This is a transparent process where the client is given full disclosure of seller’s information such as contact details and pricing. We also provide a secure assembly center facility for general assembly, inspection, and packaging.

Does PassageMaker receive a commission from suppliers?

Definitely not.

We do not accept commissions, bribes or kickbacks from suppliers. We are not a factory representative steering the client towards a pre-selected vendor, rather we are an independent sourcing agent that is looking out for the best interests of the client and putting them in touch with the best possible suppliers.

Is PassageMaker worried it will be cut out of the supply chain if buyers deal direct with sub-suppliers?

No. We provide value in the form of efficient production management, assembly, and QC that saves time and money for both the buyer and seller.

Our clients realize that our fees are easily covered by the savings generated through proper supply chain management and QC. Furthermore, the costs of setting up their own sourcing office or hiring the staff to deal direct with the factory would far outweigh our service fees. Actually, in some cases our goal is to help the buyer “ramp up” production in China and put them in a position to deal directly with the suppliers on their own if desired. Our trust and transparency allows for this scalability.

The factory is happy to have PassageMaker involved as we help them communicate effectively with the buyer and offer advice on how to best service the customer.

How can PassageMaker be of assistance if I already have a supply chain in China?

PassageMaker can supplement a customer’s existing supply chain with quality control and assembly/packaging. The customer may also find it beneficial for PassageMaker to identify price points from other suppliers for negotiation purposes with your current vendors.

Why should I disclose my target price to PassageMaker during the supplier identification research?

In China, there is a wide range of quality among various vendors for any given product. By knowing the customer’s target price, we can work to find the best quality in that price range. We do not disclose customer target prices to suppliers.

What should I know when comparing PassageMaker’s service fees for Assembly/Inspection and Vendor Coordination to other companies?

If you are concerned about price, security or quality then it is essential that you clarify the compensation structure to your service provider. Here is a look at some of the tricks used by intermediaries (they go by names such as trading company, sourcing agents, factory representative, consultant, broker.) to hide true interests and compensation.

• If they are compensated by the supply side then their interests are aligned with the seller not you the customer. You would be surprised by the number of sourcing agents and trading companies whom claim to be buyer representatives yet receive kickbacks and commissions from the vendors.
• If they are compensated by you based on a percent of Purchase Order value, then there is no incentive to cut costs.
• If your service provider is not the actual factory and gives you a final price per unit without disclosing the actual margin, then most likely you are paying too much. They justify a margin by saying that their value comes from “having done the work to qualify the sub-suppliers or leveraging group buying power or providing project management services”. But if they are afraid to state their actual margin then they know the services provided don’t justify their mark up. Furthermore, if they do not disclose the actual manufacturer, then you have no way to validate the quality process in place and you have lost control over who has access to your intellectual property.
• If on their website they don’t clearly state their fee structure, then they may not be confident in the value they provide to your supply chain. Worse yet, it may indicate they don’t have the required China sourcing experience and are unsure how to even price their services. One trick they use to mask their lack of a well defined service and value is to state something along the lines of “each project is different and they tailor their services accordingly”. That really means they are trying to adjust their fees based on the how deep they believe the pockets of the potential client are rather than sighting a well defined, pre-existing system based on years of China project experience. Consultants in particular use this sales technique.

At PassageMaker there are no hidden mark ups or agendas. Let’s look at how we invoice a typical assembly and inspection project.

In cases where the client does not have existing sub-suppliers in China, PassageMaker conducts a feasibility study to identify suitable suppliers meeting your requirements for price, lead time, and quality. Visit our sourcing feasibility price section or the next FAQ answer for detailed explanation on the fees associated with this research. All pricing and sub-supplier identities developed in the initial research are made transparent to the client. The components from the sub-suppliers are then delivered to PassageMaker for assembly and inspection before leaving China.

All sub-suppliers used are pre-approved by the client as part of the feasibility study. PassageMaker does not apply a mark up to the components. We simply charge a transparent, per unit fee to perform inspection/assembly/vendor coordination services. This fee is based on the actual labor and management to inspect and assemble your given product. If a service provider can’t justify their margin by providing actual value to your supply chain, then they shouldn’t be in the supply chain!

Full details on PassageMaker’s transparent pricing are stated publicly throughout this web site.

When considering a partner in China, make sure you ask about factory ownership, compensation structure, client references, non-compete clauses, quality systems, sub-supplier pricing and identity, company history, warranty terms and the plan for protecting your Intellectual Property (click here for a behind the scenes look at common pricing scams in China).

At PassageMaker we fully understand the importance of trust and transparency and welcome any questions you may have.

Why pay PassageMaker for a feasibility study ⁄ sub-supplier identification research when I can find my own suppliers online or use a trading company that doesn’t charge for this research?

When looking to source in China, you have a number of options to find supplier with various costs involved at your disposal. Below is a behind the scenes look at the pros and cons of each option.

• Do it yourself

Thanks to free and easy-to-use websites like Global Sources, generating a list of potential vendors has never been easier. But make sure you have the time, engineering and China sourcing experience to narrow a massive pool of vendors down to a handful of highly qualified vendors. Simply picking the first 3 vendors that come up on an internet search is highly unlikely to uncover the best match for your particular requirements. If for budgetary reasons you are forced to DIY, we hope the tips throughout our website and FAQ will get you pointed in the right direction.

• Engage an intermediary (trading company, sourcing agent or factory representative…) to conduct this research on your behalf.

It is worth paying for professional research if you don’t have the time and China experience to conduct the supplier identification research on your own. There are 3 common methods used in China to invoice for the initial supplier research:

• Charge a % of the future PO value. Generally 5 to 15%. While this is an easy to calculate figure, unfortunately there is no incentive for the research partner to keep costs low. Actually the incentive is to steer the buyer toward the most expensive sourcing option.
• Invoice a set research fee. At PassageMaker for example, a fee of a few thousand USD is charged per production classification researched.
• “For Free”. Some companies will offer to conduct the initial supplier identification for free. However, while it sounds the most attractive at first, nothing is done for free in China and quite often the “for free” model is the most expensive in the long run. As explained in following FAQ sections, our team of experienced sourcing engineers will require 30-45 days and spend 100’s of man hours, leveraging years of China sourcing experience to narrow this list from 100’s of choices down to the top candidates. If somebody offers to “do it for free” this is what may be really happening:

1. They will decide which sub-suppliers to use. That means they may select the supplier which is best for them, not best for you. Perhaps where they have a relative, kickback or commission. In effect the buyer is getting steered towards a supplier which may not be the best match for the buyer’s specific requirements.
2. “You get what you pay for”. They don’t plan to conduct in-depth research on a national level. If someone is providing research for free, they may not be as conscientious about understanding your goals and helping to find the right supplier. Keep in mind that finding the right supplier is the single most important factor in determining if your project will succeed or fail.
3. They plan to cover the internal costs of the initial research by charging you an inflated per-unit cost once production starts. In the long run, the buyer pays too much.

Insider Tip: If your “partner” is unwilling to state the name of the sub-suppliers and give the pricing points, then you are certainly paying too much. Furthermore, if they do not disclose the actual manufacturer, then you have no way to validate the quality process in place and you have lost control over who has access to your intellectual property.

Unfortunately, even if you pay a company in China to conduct this supplier research you can’t automatically assume they are looking out for your best interests. (Know more about common pricing scams in China.) It is common in China for trading companies to milk both ends, in other words charge the buyer for a research fee or commission while getting a kick back or other commission from the supplier. Therefore, you must perform due diligence on your research partners as well.

When considering a research partner in China, make sure you ask about ownership, compensation structure, client references, non-compete clauses, research methodology, full disclosure of sub-supplier pricing and identity, company history, warranty terms and the plan for protecting your intellectual property. At PassageMaker for example, by paying a research fee you can rest assured that we take the project seriously and will review each and every detail to ensure your goals are met. We fully understand the importance of trust and transparency, and when we are hired for supplier identification research we offer total disclosure of the above information in our contract, so it’s absolutely clear where compensation comes from and that our interests are 100% aligned with the buyer. Should you pay for research in China, make sure you have such a contract in place. If your “partner” is doing the research for free, then they are not obligated to do a professional job.

How are potential suppliers identified?

The single most important factor in determining the success or failure of your sourcing program will be finding the right supplier. It sounds obvious, but making apples-to-apples comparisons of vendors at a national level can be daunting. The following is a behind the scenes look at a how PassageMaker assists its clients find vendors in China. This system outlined below is based on the company’s 10 years of experience in China and 1000′s of sourcing programs.

A professional sourcing feasibility study / supplier identification research should have a clear methodology for defining and measuring the desired attributes of the ideal supplier.

Step One “Defining”: The “right supplier” is unique to each buyer, as the relative weight placed on price, quality, lead time and other attributes differs from project to project. Below is an attribute survey template used to transfer this information from buyer to research team.

Step Two “Measuring”: At PassageMaker a typical supplier identification research project takes 30-45 working days assuming multiple components and production methods need to be explored, at a national level. The process is as follows:

• Initial research generates a list of 50-100 potential suppliers using web directories like www.GlobalSources.com and industry/trade show directories. At PassageMaker, the Approved Vendor List (AVL) can be consulted to see if any known suppliers should be added to the list.

Insider Tips:

1. Assume the vendor is a middleman until proven otherwise, not the other way around.
2. Avoid factories that refuse to list the name or location of the production facility. If they only show a HK, Taiwan or other non-PRC address, then they probably don’t own the PRC factory and are a middleman of some sort.
3. Focus on those factories that can clearly show production experience with your particular product or production method.
4. Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.
5. Look for clear information about operation size, equipment and staffing.

Visit http://psschina.com/resources/passagemaker-articles/ for related articles on avoiding middlemen in China.

• Review the 50-100 candidates’ websites and brochures against client’s desired attribute list and narrow the field down to 15 to 20 candidates. At this point, “first contact” is initiated in the follow ways:

1. Send an e-mail or make a phone call to ask for initial product-specific information (price, minimum order size, lead time).
2. Are samples available? If they don’t have samples readily available, they probably don’t deal in your product on a regular basis.
3. Granted the sales team will be the most polished in terms of English skills, but how is their understanding of your basic requests? If you ask for information on a red umbrella and get sent a sample of a blue shoe, you are going to have problems with communication down the road!
4. Confirm the actual production location and ask for ownership papers of the factory. Be explicit that the production location may be audited and that this location can not be changed w/out approval of buyer. (You would be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poorer quality option after the buyer leaves)

• The above research should narrow the field down to about 5 highly qualified candidates. At this stage, PassageMaker QC engineers and Sourcing Managers (joined by the client when possible) visit the factories in person to review quality systems, confirm production methods, negotiate pricing and look for any red flags. In other words, visit the production facility to confirm the information given during the initial research was accurate and truthful. This is an essential yet often overlooked step by those looking to cut corners during research. Unfortunately, due to the massive number of trading companies and aggressive China sales staff who will say almost anything to get your business, visiting the production line in person (or via your appointed representative) is the only way to confirm the real situation.

• Based on the results of the factory visits, the next phase is sampling, trial order or even Purchase Order placement with the top vendor or two.

Visit our article section for related articles on Negotiation and Vendor Coordination

Corporate Social Responsibility

Are concerns over “sweatshop labor” and environmental protection addressed?

We are proud that PassageMaker and its sub-suppliers are in compliance with local, national and applicable international standards for workplace safety and environmental protection.

When conducting sub-supplier identification and analysis for our customers, our research takes into account supplier compliance with workplace standards for safety and environment. Vendor Code of Conduct Standards are signed and enforced. On-going audits ensure that standards are maintained.

Value Added Tax (VAT)

What is VAT and why should I worry about it?

VAT is one of the most confusing and often overlooked issues when purchasing from China.

At the risk of oversimplifying, in theory a 17% tax is paid at each step as the given product flows down the supply chain toward the end users. Take the example of a plastic comb. Raw plastic is purchased for injection molding, then the molded comb is sold to a beauty product distributor who in turn sells to a trading company for eventual export. When the comb is exported, there may be a VAT rebate of 0-17% (depending on the product classification) against the 17% taxes paid. Without going into the complex tax formulas, let’s say the VAT rebate for plastic combs is 10%. So 17-10=7% amount the stays in the government coffers while 10% goes back to the exporting company.

Overlooking the impact of VAT on your sourcing project can lead to major complications:

• If you don’t know the VAT rebate amount, then you don’t really know your vendor’s true pricing. This can complicate negotiations and vendor comparisons. The vendor may be pocketing the VAT rebate with out explaining to the buyer. To further complicate the situation, VAT and product classification can be negotiated with the local customs bureau. So basically, a vendor may tell you they are only getting a certain % back, when in reality it may be much more.
• Unlike PassageMaker, many vendor’s lack import-export rights and proper VAT processing facilities. They are forced to use 3rd party trading companies which inflate the price and complicate the relationship.
• If the order is small, vendors may find ways to avoid the VAT issue (can’t get a rebate if it wasn’t paid in the first place!) and offer a “non VAT price”. While a “no tax price” may be attractive at first, things get can get ugly when:

1. you buy direct from the factory in China, but find out later you can’t export out of the country because of a lack of tax documentation.
2. the volume of business grows to a point that the supplier can’t avoid putting the tax payment on their books. Just when you are expecting a price discount for a large order, out of the blue you get smacked with an increase for a tax that now all of the sudden has to be paid.

PassageMaker is in a unique position to help our customers avoid VAT issues as, according to our knowledge, we are the only US-owned Contract Assembly/ Inspection facilities to be granted full import-export rights and authorized to process VAT rebates by the Chinese government in Shenzhen.

Intellectual Property and Branding

How to ensure that blueprints, tooling, and brand names are protected?

Consider using PassageMaker’s China based Assembly / Packaging/ Consolidation Warehouse:

American managed warehouse provides centralized, secure, reliable environment for in-bound QC, assembly, packaging and freight consolidation. Information is kept confidential and products are looked after in a professional manner. QC issues are dealt with before goods are shipped. Chinese suppliers are prevented from turning into future competitors and shipping costs are reduced through freight consolidation.

PassageMaker’s sourcing team manages your risk exposure should sub-suppliers need to be developed:

• PassageMaker conducts due diligence into the reputation of the potential supplier and provides a risk assessment to our client.
• During the initial stages of the research, we often divide the product into separate components and do not disclose the final use. In this way we can price out the individual parts without disclosing the entire product.
• We are also very careful not to share client contact information on the samples or prints unless given permission in advance. No need to make public your interest in sourcing from China.

Once supplier has been selected:

• Own the tooling out right. Any funny business and tooling is extracted from vendor.
• Sign letters of confidentiality and exclusivity with vendor.
• Trademark your brand in China. Having done this, the court system is on your side should you face infringement. Luckily, registration is inexpensive and straight forward. Costs are under 2000 USD in most cases. Visit our partnership page for references in this field.
• Frequent visits to production site on your behalf allow us to keep an eye on the situation.
  

Order Sizes, Lead times, Samples, etc.

What is the order size of a typical PassageMaker client?

While the typical PassageMaker client is usually a tier 1 or 2 supplier to major retailers and purchases USD 1 million or more in China per annum, we also welcome small and even new businesses as clients. These businesses are suitable PassageMaker clients if their products demonstrate a high potential for growth and the client can commit to a minimum annual invoiced amount of 20,000 USD worth of our services. These services might include sourcing feasibility studies, vendor coordination or assembly/inspection.

Are there minimum order sizes?

Small Orders

It can be difficult to interest suppliers in small order sizes (10,000 USD and below per year). There certainly are suppliers willing to work on smaller orders, but finding them is more difficult.

Large Orders

Large order sizes (over 1 million USD) often require greater due diligence into potential partners to ensure suppliers do not become future competitors. Issues of logistics, lead times and duty rates must also be explored in great detail.

Standard Orders

Most PassageMaker customers are shipping at the container load level, which in terms of US Dollars per annual purchase order (PO) is between $80,000 and $500,000. Our smallest project was for $2,000 worth of apparel and the largest for $52 million in auto parts.

How many samples should I send if PassageMaker is hired for a sourcing feasibility study?

When size and cost permit, we recommend sending 5-10 samples. Keep in mind that a counter-sample should remain in our office while remaining samples are sent to potential suppliers for review and quotation. Sending a single sample to various potential suppliers located across China can significantly increase the time needed for project delivery.

Do I need the Chinese address to mail things to PassageMaker?

It is a good idea to attach to your package a copy of the address in Chinese along with the English version. We would be happy to fax you this information which you can cut and paste to your parcel. Alternately, you can print the Chinese and English address yourself. It can be found here .

QC – Quality Control

What are some of the key terms and concepts I need to understand regarding Quality control in China?

Quality Control (QC): A system that is put in place by a manufacturer to monitor and maintain quality as goods flow from raw materials (IQC) into semi-finished goods (IPQC) into finished goods ready and packaged for shipment (FQC). Visit our Product Quality Manual for an example of a QC system.

Quality Assurance (QA) or Third Party QC (3PQC): An outside party that reviews the QC system of the factory and provides additional testing, inspection and/or audit services as “insurance” or a “double check”

ISO: Family of standards and guidelines for measuring quality in the manufacturing and service industries from the International Organization for Standardization (ISO). However, ISO certification does not guarantee product quality. It ensures that the processes that develop the product are documented and performed in a quality manner. In other words, a concrete life jacket could be made in an ISO system, but you wouldn’t want to go swimming with it! ISO is about the system for making something rather than the product being made inside that system.

Min vs. Major vs. Critical Defects: A Critical defect could cause physical harm and is considered dangerous- example a piece that easily breaks off and becomes a choke hazard. A Major Defect is something that will impact the ability to sell the product. Example- a scratch on the show surface of a microwave. A Minor defect is an acceptable defect that’s root cause should be corrected in future before it becomes a major or critical defect, for example, a small scratch on the interior housing of a microwave which can’t be viewed by consumer and don’t effect function of product.

Testing vs. Inspection vs. Audit

• Testing: AKA Laboratory Testing, Product Life Testing = seeing how one (ideally representative sample) handles itself against certain specification and requirements either in a laboratory or controlled environment.
• Inspection: Pulling a random sample from production line, warehouse or market place, to compare against agreed standards.
• Audit: Two main kinds Factory Audit (FA)= tech assessment of people, skills, process and equipment Social Audit (SA) or Corporate Social Responsibility (CSR) = child labor, min wage, OT, insurance, work place safety.

In other words, Samples are Tested, Products are Inspected and Factories are Audited.

Visiting China

Do I need to visit China to supervise my project?

PassageMaker works as your office on the ground in China, so we are happy to handle any concerns you might have about your project.  If you wish to inspect supplier factories in China, however, you are more than welcome to come visit.  Please note that the visa process can take some time, so be sure to plan your itinerary well in advance.

Can PM help me visit factories in China?

Of course.  PM can help with plane tickets, visa information, hotel accommodation, and scheduling an interpreter.  While a visit to China is not necessary to complete most projects, many of our clients enjoy seeing the production line first-hand.  More information on visiting China can be found on our Guest Services page.