Fix Cost Sourcing Service—Does it make sense that your China sourcing agents charge by percentage of your spend?
Fix cost sourcing is a type of sourcing service that performs purely as a service provider to buyer and is on 100% benefit to the buyer who is paying for the service. Unlike the most common commission-based sourcing service, fix cost sourcing service is a suitable outsourcing strategy for mission critical projects that expect to result in a list of fair, non-biased comparison on supplier competitiveness in a new supply market.
It is fairly easy to find a sourcing company in China – try it yourself by asking for this in a LinkedIn group and you will have quite some people raise their hand for the work. Most common charging structure from them is to take a % from your purchase amount in a fixed period of time, say, the first year or so. Most of them could give you a list of suppliers easily, even for free in some cases. Assuming you pick one who asked for a reasonable % that you agree with, the agent will do their sourcing work by their process (assuming you pick one who has a clearly presented process), and eventually lead to a supplier that you can work with. Some of them could follow up the negotiation process or even new product industrialization process. Eventually he or she will either get payment from you or your supplier, or both. Case closed.
Sound good? True, but only in some cases. Let’s see more scenarios. Let’s say, you have a half millions sourcing project that critically requires having a shortlist of capable suppliers within 1 month or even few weeks. You know China is a good source for the product but you do not have any experience nor network locally to perform the task. As a new project you do not have all the necessary product and technical knowledge and you would like to work with a supplier that knows your product and industry well enough. Your business unit and product marketing folks need to launch the project on target quality, price and most importantly, on schedule, so as to compete in the market. Strong pressure that you just could not afford to waste time nor rely on an agency who is not committed.
You go to internet, list your request, someone raise their hand for the job. You discuss with them for your requirement and tell them how important it is to meet the target. You get a firm “YES” confirmation from one of your agent. The agent start to source and discuss with potential suppliers. Unfortunately your target is tough and not all suppliers interested to your RFQ due to the difficulty and complexity of your questions. Your agent come back to you, with the bad news of the progress, and an even worse news that he/she want to quit the project due to the complexity and uncertainty to meet the target result and earn his commission. Of course you are upset. You disagree, you yell, but it doesn’t help anything. The agent just disappeared. In most cases, I am not sure the agent will even consider there was something wrong. He didn’t get paid nor contracted. It is just a casual relationship without any official commitment.
Yet with a professional sourcing service provider like SAOS, this shall not happen. We will have project analysis before they make a commitment and will charge only when the project is completed as you expected. An official contract will also be signed for the insurance of your interest.
And What about cost of the sourcing service? From my understanding most agent charge between 3 to 8% (I understand a famous HK based sourcing company run by American charge as much as 7 to 11%!). Let’s assume you go for price and take an agency charge for 2% only. In your half million project you will pay 10K USD to your agent. In our fix cost based sourcing service, we charge by man hour in most cases and for a single product family sourcing we seldom go higher than this figure – not even close. Price is purely based on the complexity of the project and doesn’t matter how big or small of your business and project.
When I started to think about how my China sourcing company SAOS should charge on a sourcing service I was quite surprise to see that people in this industry is actually charging to a % of the total purchase amount. As a matter of fact, the sourcing effort required to do a good job for a smaller project should not be too different from a high volume project. The difference, if any, should be in the term of product development and industrialization process, which is naturally a post-sourcing process after you identify and contract with your supplier.
Think deeper, if my paid is related to the total amount of spending, will I make more profit if a supplier with higher cost is selected? Will this pay system discourage me from recommending low cost suppliers?? System Error!
I believe that sourcing service should be a non-risk taking, consulting+ operation based business process. Unlike trading, which aims to take advantage of an unbalance point of a market and take risk for higher profit, sourcing should be purely professional service. Charging by consulting fee and/or man-hour effort makes more sense to us. That is what we are doing today and our customer is comfortable to our relationship as we do.
Ben Chu, SAOS Founder