Looking for a manufacturing partner? A quick search on Google or Alibaba will surface hundreds of results. It isn’t difficult to find a factory – but it is a much harder task to find the right one.
Entrepreneurs struggle to find and vet a manufacturing partner overseas. Many turn to sourcing agents to be their in-country representative. Sourcing agents can make the task of getting your product made easier but come with their own risks. How do you know if they’re connecting you with the best factory and negotiating the best price? Often they are secretly working on the factory’s behalf. Here’s what you need to know about the risks of working with a sourcing agent.
What is a sourcing agent?
When working with a factory overseas, there are four common options for getting your product made:
- Work with a third party
- Work directly with the manufacturer (direct purchase)
- Work with a trader or distributor
- Work with a sourcing agent
According to one report, 80% of entrepreneurs work directly with the manufacturer, which gives them control over the process and saves money from avoiding commissions and fees to a third party or agent. However, if you’re new to sourcing, you might want to bring on a sourcing agent: someone who manages the relationship with the factory. A sourcing agent is someone who can reach to a supplier or manufacturer to source the product you need, making a commission in the process. Sourcing agents offer a measure of control over the final product, customization, and at a lower fee than working with a distributor or trader. But there are a number of risks to working with a sourcing agent.
The risks of working with sourcing agents
Sourcing agents aren’t always as altruistic – or as helpful – as they might appear. On one hand, a sourcing agent can provide access to a network of vetted factories and save entrepreneurs a lot of time. They can help you navigate the process and serve as your in-country representative.
On the other hand, more than 90% of sourcing agents are reported to get hidden commissions from factories. “As a result, when things go wrong, they often tend to defend the factory,” writes one expert. “Some intermediaries are invaluable. Others are completely incompetent or, even worse, flat out crooks. Some do not even reveal that they are acting as an intermediary, leading you to believe you are dealing directly with the factory.”
Sourcing agents commonly take advantage of uninformed entrepreneurs by manipulating the pricing scheme in the factory’s favor. There are a few ways that a sourcing agent charges for their work. Some charge a large flat fee upfront; others charge “a percentage of your manufacturing transactions for some set period of time or a set number of transactions.”
In each of these instances, it’s easy for the sourcing agent to find a low-cost (and often low-quality) manufacturer and split the difference with the factory. For instance, a sourcing agent could charge an entrepreneur $1,000 upfront for a job that costs $500. The $500 difference gets split between the sourcing agent and the manufacturer – and the entrepreneur knows nothing. Other sourcing agents charge hidden commissions or work simply source the product from a different factory than the one they’ve advertised.
How to vet a sourcing agent
It is very hard for an entrepreneur to verify that a sourcing agent is being transparent about their role in the transaction. But, sourcing agents can also be invaluable partners. Vetting a sourcing agent requires asking the right questions and getting referrals from other entrepreneurs who have gone through this same process.