I’m having to search far-off China for raw materials much more frequently these days. The availability of many US manufactured chemicals is slowly falling off.  Especially for really basic materials.  I’m not referring to those mundane elements like iron or soda ash or copper. No no. materials from the folds and deep recesses of the periodic table. Elements with relativistic electrons.  There are short term economic pluses and minuses to this migration of manufacturing.

On the plus side, Chinese prices are often, well,  quite low. Even with multimodal freight charges from across the Pacific. When you pay peasants fresh off the farm $40/month (or whatever insane wage it is), you can undercut nearly everyone in pricing. 

But there is a down side to spot buying from China.  This is to be distinguished from contract purchasing.  In contract purchasing, you work out an agreement with a manufacturer and you lock in quality, price, and delivery in exchange for long term business.  Spot buying, however, is much more risky. What do I mean by that?

Spot buying is where you find a merchant supplier who can furnish material without the fuss and obligations of a contract.  Either they have it in inventory, they can source it quickly, or they themselves will make it pronto.  A supply contract has to be managed or enforced.  For raw materials that are less than critical, finding a spot supplier makes sense. 

Locating a spot supplier in China that you can trust is problematic. I’m not suggesting that Chinese suppliers are dishonest.  I am saying, however, that culling out a supplier from a list of unfamiliar names from the other side of the world without the benefit of a site visit or a Dunn and Bradstreet report can be risky. Spot buying anywhere is risky, but when it is complicated by international transactions, the risk multiplies a bit.

It is relatively easy to find contacts on the web that will reply to an RFQ (request for quotation) by email (often “hotmail” accounts) and make an offer.  But what you find is that you may be in contact with an agent of some description in an office suite in Shanghai, far from the factory.  Indeed, it is hard to tell just what the relationship is between the factory and your contact.  To salve over some of the uncertainty westerners may have, it is common now for these web contacts take on western names. 

Brokering goods is common in some parts of the world and scarce in others.  In the USA, brokering chemicals is fairly uncommon.  Most US companies prefer to do bulk business with the manufacturer or a catalog house.   Sigma Aldrich, for instance, is both a catalog company and a manfacturer of bulk and semi-bulk materials.  Purchasing from a broker (as opposed to a distributor) rather than the manufacturer will add costs to the transaction.  A broker is someone who connects the purchaser with the supplier.  Usually they perform drop shipments to the purchaser directly from the manufacturer.  A broker is a sort of “free agent” sales group.

I have found that there is a greater reliance on brokering in Asia and to a lesser extent, the EU.  The internet has made life a bit trickier for brokers in that a search for manufacturers is a lot less painful than it used to be.

A company will work through a broker for several reasons. Brokers are usually specialists, so a company can tap into considerable expertise in supply chain management.  And, the broker only gets paid if they find a qualifying supplier, so a manufacturer could conceivably keep the head count down. Brokers might be better at the intricacies of negotiation as well.  There are a lot of tough guys running companies out there who are actually poor negotiators.

These agents seem to work in organizations that carry on the sales and marketing activity for a factory or a series of factories.  In addition to unfamiliar business practices, there is the matter of payment.  Many Chinese companies want prepayment- they do not automatically offer 30 days net.  This makes company controllers and project managers nervous.  Since this is an international transaction, customary business laws covering remedies are not applicable. In other words, you can get royally screwed. But from their perspective, it is the same issue.  So settling into a supply relationship can take time.