While it would be great to be able to fill any size order out of warehoused stock, this becomes impossible during the current pandemic, in which the required number of different products needed exceeds 100, and orders can ranges from a few pieces to millions of them. To service this situation, orders can be filled by shipping directly from the contract manufacturer or import source to the buyers door. And that means taking precautions to ensure full transaction assurance, such that the buyer gets what they are paying for.
To ensure a satisfactory result of contract manufacturing or importing of goods, like any transaction, one must ensure that they are getting what they paid for. This can be assured by not paying for the goods until they are verified to meet expectations…whether the inspection is personally by the buyer, upon delivery, or by a competent third-party inspection company, before shipping.
Transaction Assurance & Product Inspection is just such a process or method for ensuring that you get what you expect and that you don’t pay for the goods until they are verified.. Sometimes this means withholding payment from the source or supplier until the goods have been delivered to the buyer; at which time the buyer inspects the goods; approves them; and authorizes payment. Alternatively, this approval could be the result of a third-party firm inspecting the goods; verifying that they meet the buyer’s specifications; and verifying that they have been made available for shipping. This is often referred to as L/C On-Sight. It is the next best thing to not paying for the goods until they have actually shipped out. This means that the supplier has provided the goods on the basis of a Letter of Credit from the buyer; expecting to be paid when the goods are in sight by the buyer (…actually, the buyer’s inspector).
Shipping Verification: Still, even if the goods have been verified to be what the buyer expects, the buyer still would like to know that they goods are in transit. So, taking the process one step further, the inspector can actually supervise the loading of the goods onto the ship or plane, such that they can actually verify shipping. From that point on, until delivered to the buyer’s door”, the goods become the responsibility of the buyer, so they should be fully insured.
How Much Insurance? It is important to know that the value of the goods can exceed the maximum amount of insurance included in the shipping charge. Shippers may limit the amount of insurance to a fixed maximum, regardless of the size of the shipment (…be it 1 container, or 10). We know to always obtain supplemental insurance to cover any possible loss that could occur between the doors of the factory and the buyer. We also know all of the possible gaps in coverage, during the trip “from door to door”, and ensure that they are filled.
Why not have the source arrange for, and include the costs of, delivery thru to a US port, or to your door? This would be nice, since it is what we are all used to from mail order. But, when large orders are involved, these terms are rare. Foreign factories are in the business of manufacturing, not logistics. They don’t know foreign customs laws, insurance is often deficient or expensive when they handle the shipping; and the pricing is lower when their responsibility ends at their warehouse door. You, as a buyer, have no idea of what surcharges might also be added to the price by the source. Thus, when we facilitate sourcing a product for you, we handle all aspects of getting the product to your door, and the manufacturer only has to worry about manufacturing!
The Mechanics of TA: Those who do not really know how TA works, whether buyer or manufacturer, have no idea of the billions of dollars of worldwide commerce that is facilitated by the process. Buyers get what they want to buy, and manufacturers don’t worry about being paid. This is enabled and goes smoothly if the process is handled diligently, It is not all that complicated: The factory proves they can perform, and the buyer proves that they will pay by irrevocably obligating themselves to do so. are capable of paying.
Letters of Credit, Etc: A Letter of Credit, in its simplest form, is a purchase agreement, and a claim that the buyer is able to pay if the seller produces some goods or service. Unfortunately, if not structured properly, the buyer’s ability to pay cannot be depended upon, and they can back out, “sticking” the factory with goods that they expected to be paid for., Plus, the factory would like to have money for raw materials, rather than having to wait until delivery to be paid. Producers may know that they can borrow based on a proper L/C, but they many no know how to do so, and they may know that there is a fee for doing so. From the buyer’s standpoint, they don’t want to pay in advance, and risk getting defective goods (or none at all( after already having paid.
Putting the Pieces together:
- Ensure that the L/C cannot be revoked by having a third-party bank guarantee it, or by having them issue a “standby letter of credit”, which is their promise to pay if the buyer does not. This is a guaranteed L/C. For a continuing series of purchases, the bank can issue a revolving L/C. In any case, these instruments eliminate the ability of the buyer to back out of a purchase agreement, as long as the supplier “delivers the goods”.
- Alternatively, escrow the actual funds with a third party escrow agent (Escrow.com, Alibaba TA, etc) who has irrevocable instructions to pay out the funds to the supplier upon certain conditions being met (satisfactory inspection, for example).
- Bring in a third party firm that will advance a deposit to the factory, as a loan to the buyer, and who will pay the balance of the invoice upon receipt of the satisfactory inspection. By they buyer making this arrangement, it avoids gripes from the factory in regard to having to pay fees if they have to borrow on the L/C as collateral for the loan.
- PURCHASE ORDER FUNDING: This can be taken one step further, when the buyer is an importer/wholesaler who already has the future goods resold to a substantial buyer. This is called Purchase Order Funding, and this middle man does not have to put up the funds or qualify for lending. The PO Funder makes the loan on the basis of the purchase agreement that the middle man has with the substantial end buyer. With a separate loan, known as “factoring”, the end buyer can even be given “terms” to pay in 30-90 days after delivery, and the middleman can even agree to pay all of the fees & interest, which will please the supplier and the end buyer. With this arrangement, everyone is happy…and the end buyer doesn’t even have to pay anything until they have resold the goods at retail!