In China sourcing, you will frequently come across the term “factory direct.”
Why is that term so conspicuous?
It conjures up the vision of the importer going direct to the source.
Like a modern-day Ponce de Leon they are going directly to the fountain of youth.
Agents, traders, buying houses…be gone!
Some companies say it as a marketing term.
Factories say it as a point-of-fact.
Benefits of factory direct
Factory direct obviously gives the impression of lower costs.
This impression is true…for the most part.
There may be a few contingencies here and there.
But largely when you buy from the source, your cost is more economic.
Anybody in between the buyer and the factory slaps on their own margin.
Previously this was a better business model when China sourcing was simply about who had access or contact details.
Now, in 2019 the rules are changing and transparency is the expectation.
As important as “factory direct” is for pricing, price shouldn’t be the main issue…
You, the importer, the one whose brand, reputation and money are on the line, need to know with whom you are working.
On your part, this takes investigation, audits or traveling to Asia.
Quality begins in knowing who manufactures your merchandise.
Problems in an overseas project start when buyers are haphazard with details.
If you demand quality, then operate in a way that results in quality.
These are the companies that buy product from the factory and resell it.
Their “factory direct” means: they are buying products directly from a factory and selling them to you.
With this you get extra margin liberally lathered onto the original price.
Kind of loses it’s intention in that way, right?
But supposedly, they make the experience very easy on the importers behalf. Wink, wink.
In order for them to make their margins, they generally take buyers’ requests to lower-end production facilities.
Unless you’re a favored buyer of the trade company, you’re largely in the dark of what’s going.
They filter updates through whatever image they want to convey.
Truthfully, there are some capable trade companies.
And there is a large bulk that create more problems than they solve.
One thing they all do, is decrease the buyer’s control over their own supply chain.
Perhaps they have their own company name, letterhead and may have a few staffing.
They aren’t as large as the above mentioned trade company and are somewhat more specific in what they manage.
I used to work with one guy who was an old hand in Taiwanese toy factories.
He was an expert in plastic molding.
We would give him our plastics work, he’d take it to a factory for us.
He did most of his work from his car. This was way back in 2004 and ’05.
You’re still losing margin but not as much as if you were dealing with a trade company.
Many overseas companies that say “they have an office in China,” actually have some sort of agreement with these types of freelancers.
Their factory direct means: they are good friends or family with with the factory owner. Or they are a group that’s specialized in that product area, ie my plastics friend from back in the day.
They are not charging you much margin, because they also get a bit of sweet kickback from the factory.
Usually the communication isn’t great from these folks and the level of control varies but isn’t that great.
They’re not seeing themselves as necessarily the “control point” of quality but more of a connector.
They leave any kind of order and quality control up to the factory until major problems arise.
Factory Off-Site Sales Offices
Now here’s a grey area.
Some factories only work through this “off-site office”.
This “off-site” office may be an actual part of the factory.
In other words, factory-owned and as much a part of the factory as the factory.
But sometimes these off-site offices are just another form of the above mentioned freelancer.
They are not necessarily the same company but the factory may only work through them.
Perhaps there’s some constraint in the factory’s overseas sales to use this office (ie an English speaking brother-in-law runs it and they feel obliged to give him the sales).
Their factory direct means: pretty much the same thing as real factory direct. If it’s not the actual company, there’s some margin loss but not as much as the trading company or freelancer.
These people sometime take forever for updates and clarity because they may be a good distance from the actual production facility.
If they were located inside of the factory, the updates would be swifter and they’d have more immediate knowledge over the product.
Many times you have to wait for them to physically arrive to the factory for any forward movement or updates.
Sometimes this is only be a few days out of a week.
As much as circumstances allow, your goal as an importer should be buying from a factory.
Most capable factories that you should be working with are able to service foreign buyers.
If a factory isn’t able to export, there may be red flags with their quality systems.
Their “factory direct” means: you are getting pricing as close to the source as possible.
It also grants you more control in your supply chain.
You have a sales contact who properly communicates and provides better control over the production lines.
Generally this salesperson is more knowledgeable over the in’s and out’s of the product than your contact in a trade company.
A few caveats for smaller factories:
- Some factories that work tightly with those off-site sales offices may actually quote you higher than the off-site sales office. If the factory doesn’t have the abilities or confidence to handle overseas buyers, they may charge more to cover any “unknowns.”
- Occasionally they’ll pitch you back to that offsite office or that freelancer if it’s family related and they feel they owe the “commission kickback” to their relative.
- If a factory is busy and their work load is too much, they will outsource part of your work to sub-factory contractors. You may not know this until later on, or until you see inconsistencies in quality or color or whatever the case may be.
(with including 3rd party vendors, this can get more in-depth but for the sake of an already long blog post, I’m going to leave it there).
Ultimately it’s your responsibility to know who manufactures your merchandise.
It’s YOU that imports the goods.
It’s your name connected with it.
It’s another layer of effort that precise importing requires.
It pays off in you having better control over your overseas projects.