Before orienting our activity in direction of product development and engineering I have played the role of buying agent in China for several years now, and I can tell that since B2B platform development this job has changed.
There are many people creating some buying agency in China and I can tell there are mainly two different business model in this industry.
1./ The typical chinese buying agent
In short, you will find plenty of those kind of buying agent in China by browsing the Internet: they will mostly attract potential buyer by proposing some free sourcing while taking a very minimal margin. The typical speech is : “Free sourcing, you pay only 1-2% comission”. The counter part is they will not give you access the source. So it is actually like a trading company = a middle men scheme.
Those type of sourcing agent in China is used by importers who have a large catalog of item and who need more sourcing power at low cost. The importer usually have a short term strategy for sourcing and procurement.
From my personal experience, those type of sourcing agent in China frequently bring trouble to their customer with quality control issue. Why ? Because think about it: which kind of company can work for free by providing free sourcing and live on a 2% growth margin whereas most of company in the world rather need to have a 30% growth margin to survive. Nobody! so there is necessarily something hidden (the real margin) and believe me there are no sourcing agent in China or buying agent who only take 2% margin commission in reality.
So, how a chinese buying agent can live ? Well, this is very simple:
They don’t live with 3% margin,as even in China you can not survive appart if you are Foxconn servicing Apple.
– first they don’t disclose the source to their customer or if they do, they don’t disclose the real source (they may introduce a china manufacturer A at high cost, but when they produce they will use a factory B cheaper but also less quality oriented) and this is how they can hide their real margin from the eyes of their client and how they can dig profit after the first two orders are made. One strategy I have seen in the past was: ” let’s get this customer by proposing the smallest price so we can catch him, we will not make profit on the first two orders, but then we will switch supplier with a cheaper and sub-standard one and we will make profit from order 3″, this is why some buyer using such buying agent will find out : “oh, the quality was good at the beginning and my trust was built with my agent, but on the third order the quality started to be irregular, and now this is catastrophic”….no comment…you get what you pay for…
By pulling hardly on the quality string with the factory to who they sub-contract they will increase their margin at maximum, pulling strong enough that may push the factory to cut corner on quality to be able to offer a lower price. Don’t be blind, there is no magic: quality of a product and its pricing are always directly opposed. It is rare a factory reduce its margin, so if the price is reduced then there is something on the product to be reduced.
So if you get a better price, this is normally that quality will suffer somewhere.
– second, those type of buying agent quite often take a commission from the factory. You might think you don’t care because it doesn’t affect you. But actually it indirectly does and in two way: first: the factory will increase slightly its price to the agent to compensate the commission given, second if you are an agent taking a commission from a factory, then you are not in a good position to be very strict on quality control.
2./ The foreign buying agent in China
The foreign buying agent in China has a different business model: normally, more transparent, more opened, and usually not ready to work for hope. So sourcing is rarely free. If it is free, you can probably deduce it may not be done very properly or you may work with a business which is just starting and which is not busy too much (which in a way mean the business is not very stable yet)
He will source by charging and will be transparent on his commission, normally he would be transparent on the source and on the supply chain, allowing its customer to have access to a maximum of parameters.
In this scheme, you pay more upfront but you pay less in the end and you have access to the supply chain.
Comparing the two types of Buying and Sourcing Agent in China
Chinese buying agent
Foreign buying agent
|Sourcing invoicing||Free||Per sourcing or per package|
|Transparency on source||Not transparent (the agent will normally not disclose the source considering this is his own asset as he didn’t get paid for the sourcing work, so he can only rely on this to keep his customer)||Transparent|
|Comission rate||“Apparently” low (they often claim 2-3%) but actually they get 25-30% by working on the margin with supplier (they success to do this by pulling at maximum on the quality of the material used at the factory, making the factory not breathing enough and finding no solution that substituting material and cutting corner to keep the order)||“Apparently” high (they often claim 5-15%). It sounds high at a first sight if you compare it with a 20% margin of a sourcing agent who would sacrifice quality for margin, then probably 10 to 15% is quite reasonnable.|
|Margin methodology||Hidden in the price of the item (not transparent) + the 2-3% comission they claim officially. As the source are not disclosed, the importer have no way to control the real cost (and doesn’t have control on the supply chain either)||Paid on the top of the product price independently of transaction. Some of them would even bill separately service and products.|
|Control on the supply chain||Limited: importer doesn’t have access the source, so doesn’t know the real price, and doesn’t know how the product is manufactured and in which conditions (kids, prisonner)||Total: the buying agent would disclose source , hence pricing and manufacturing process.|
|Consequences on supply chain control||– Price distorsed
– Raw materials untraceable- May employ children for manufacturing
– May switch supplier time to time making quality being inconsistant- can not control where design are going (packaging design for example)- you may not be able to supply your customer if for any reason the supply chain is cut between you and the factory
|Total control as the stakeholder in the supply chain are fully identified|
|What most of importers complain about||They have quality issue so what they save in comission, they actually spend it in recall and refunding customer||They think they pay too much high comission|
|Would take commission from supplier||Yes (5-10%)||No|
|Would be partial on quality control||Yes (because no buying agent like to keep goods, they have to ship to make some money), so you will rarely see a buying agent issuing a FAIL quality control report to their customer, otherwise the importer will not release money for shipment…||No, as they are not really involved in the transaction|
Buying Agent structure fee
How the fees for buying agent in China are calculated. Well there is no general rules, but logically the percentage should be higher if you are purchasing from 100 different supplier with 10 000 USD (1 millions USD consolidated order total) order than if you purchase from 10 different suppliers with order of 100 000 USD (also 1 millions USD consolidated order) for each, because the work is totally different: sourcing 100 suppliers or sourcing 10 is not the same workload.
Quite often, western buying agent may apply a retainer fees (to cover its expenses), plus a comissioning (his margin).
As explained earlier, some agent source for free. Personally I never do this because I consider my time is valuable, hence not free. So I always charge my customer for this work.
The tasks of the buying agent
What should include the mission of a sourcing agent in China. I usually cut this in 3 parts:
1./ Sourcing item and supplier
2./ Managing with procurement and mass production
3./ Handling with export and logistic
What is your experience with buying agent ?