Factory Direct vs Trading Company

[et_pb_section admin_label=”section”][et_pb_row admin_label=”row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Many years ago in China, it was actually quite rare for factories to work directly with buyers from foreign countries. But over time, China began to see opportunity, and so reformed its policies and procedures in order to invite the outside world to work with them. Factories, on average, knew almost nothing about the foreign market…. for example, international product safety requirements and quality standards were totally foreign in every possible way. In addition to the regulatory issues, factories also lacked salespeople who spoke English. And so, trading companies were created as a bridge between the factories in China, and the outside world.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

But now it’s been over 30 years since this process of reforming policies and procedures, and things have completely changed. The factories now have skilled salespeople who not only speak English well, but also know the foreign market, policies and procedures quite well. So really it is no longer necessary to do business with factories through the trading companies.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

As the sourcing expert here at Cascadia, I strongly recommend that you simply work with the factory directly. Doing so will offer a couple of key advantages. First of all, cutting out the middle man is going to get you a much cheaper price:

  • The trading company works on commission. When you do business through them, you have to pay commission to them. Before I joined in, Amazon Basics did business through a trading company located in Shanghai. Each order placed by Amazon Basics contained a certain percentage of commission to that trading company. But after I joined Amazon, we chose to work with the factories directly. As a result, we saved the cost on the commission.
  • Since the trading company works on commission only, they do not care much about the product cost. As a result, they do not bargain very well for the lowest price for you. Let’s take the ordering of a beer mug as an example. The quotation from the factory to the trading company is $5 per piece. If the trading company knows that this is acceptable for you, they will accept the quotation as the final price. But in fact if would bargain a little, the mug’s price could possibly be $4.50 per piece. And with larger order quantity, the price could be bargained even lower. However, most trading companies will not bother to bargain for the better price simply because there is no motivation for them to do so.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Secondly, direct communication with the factory is much easier and quicker. When you work with a trading company, questions and concerns regarding product all have to go through the trading company first, and the trading company checks with the factory. Then the factory replies in kind to the trading company, who then reply to you. It is time consuming because you are dependent on the responsiveness of two different companies. And, because there are so many moving parts, mistakes and misinformation at some point are almost a given. For example, the Pantone number for the pink color of Hello Kitty is 670 U. It is possible that could be changed into 670 without U, or 670 V due to a typo, right in the middle of the process. But when you are able to talk with the factory directly, the chance of such a simple mistake is reduced greatly.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Thirdly, the product’s quality can simply be controlled much better.  Without an intermediary, the factory can communicate directly with you and know your requirements better. If they have questions, they can contact you immediately, as they know that they can get the answer quickly. Nobody likes complicated communication! With better understanding, the factory knows how to focus on your product and get better quality. For example, when working on a project involving a kettle, I was able to inform the factory directly that its thermostat should be Strix, a brand with superior quality. The factory consequently realized that we wanted higher level quality, and were very careful with the quality of our order.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Lastly, since the trading company works on commission, and the payment terms are between you and the factory, the trading company has no vested interest in your bottom line. The trading company may bargain a bit for a better price but the truth is that they will not work all that hard to get better payment terms for you. You may pay the factory a 35% advance payment for example, when they may actually have been willing to accept a 25% advance payment.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

The bottom line is that with direct cooperation and communication, the factory understands you more than when you’re working through a trading company. A rapport is built up. As a result, they will serve you better and both parties will have enjoy a more fruitful transaction. And because that rapport is already in place, when they have new product coming up, guess who they contact first? Amazon Basics was the 1st retailer to launch 64GB memory card, just because one of our factories shared with us the whole development, thanks to a relationship that had been built previously. And conversely, when we have new product planned for development, the factory is happy to help us to make it a reality. When you work through a trading company, you just don’t have that same visibility and latitude with the factory.

[/et_pb_text][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]

Times they are a changing, and over the years, great improvements have been made in China’s factories. There once was a time when a trading company was a wonderful bridge between you and the factory, but the time has come to just do business with the factory. We at Cascadia are professional consultants who are well-versed in dealing directly with the factories. We can help you be in touch with the factory directly and make the transition from dependence on a trading company to being in direct control of the manufacture of your product. Contact us to learn more!

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]

About the Author
I am a former Amazonian, where I spent 3 years as a sourcing consultant. I have more than ten years of sourcing experience, both at Amazon and sourcing electrical home appliances. As an experienced sourcing consultant, I know how to help clients distinguish between a true factory and a pretender trading company - getting our clients the best possible pricing and long-term relationships with legitimate businesses rather than those who would take advantage of naive entrepreneurs, sadly often found on Alibaba.

Leave a Comment

Sign up for our Newsletter!

Get updates, new blog posts, special offers, and upcoming show information in your inbox.