[FAIL] How 1 production mistake killed my profitable product!

Time for another story!

I use to have this product that was doing very well! Like all my new products it started with the following steps:

  1. Contact Alibaba suppliers.
  2. Request & evaluate samples from suppliers.
  3. Negotiate price with suppliers who have the best samples.
  4. Place first order: 1000 units.

This is very brief how I start when I import products from China. I have written a more detailed guide here.

So after I placed my first order I shipped the 1000 units to Amazon FBA warehouse and started launching the product. The product started getting reviews and the first organic sales came in. Shortly after that, sales really started picking up and I needed to place a second order. The product had an average 4.6 stars and was doing enough sales that I could increase the quantity of my second order.

I decided to order 3000 units for the second order as the product was doing very well. Since I was ordering 3 times as many units as my first order, I wanted to pay a lower price to my supplier. On the first order I paid $2,67 per unit. For the second order I was able to negotiate the price down to $2,19. I was very happy I saved $0,48 on 3000 units = $1440 in total on this order. I could not wait until the second order arrived at Amazon and I could ramp up the promotion even more! When the second batch of products arrived in the warehouse I started getting loads of 1 star reviews.

I got screwed!

Most of them mentioned that the product was very flimsy and some parts were missing. The product was made out of plastic and it didn’t take long for me to realise the supplier had screwed me. I decided to ship 20 products to my home so I could verify what I was already suspecting:

  • The second batch was made out of way thinner plastic the the sample I have received & the first batch.
  • Out of the 20 products, 11 had missing parts.

By this time my average review rating dropped to 3 stars, and I had to liquidate the remaining units for a loss. I believe that because I had squeezed my supplier out of a large part of his profit ( by negotiating the price down by $0,48 per piece ), he decided to save on his expenses by using a cheaper type of plastic. He probably also skipped any type of quality control as loads of units had missing pieces. This completely killed my very profitable profit, as the review rating dropped to 3 stars and I had to lower my price drastically to even sell the remaining units. The product was generating around $1500 in profit for me per month and was rising! Now the product is completely dead.

How to prevent this?

1). Inspection in China

All of this could be prevented with 1 simple step: Have the products inspected in China!

This was a very valuable lesson for me to learn and I now have all my orders inspected while they are still in the factory. The inspector will spend 1 day at the factory and create a very detailed report about his findings. Here are just some of the things he will include in the report:

  • Sample size: Amount of units he tested.
  • Type of material used for products.
  • Amount of critical, major & minor defects are found.
  • Pictures of all the defects found.
  • Pictures of the factory & working conditions.
  • Shipping mark used on carton.
  • Test if the barcode on the packaging is scannable?
  • Are all required warning labels attached on the packaging?
  • Size of product, product packaging & carton.
  • Weight of product, product packaging & carton.
  • Drop test: Carton will be dropped from 3 foot, as per Amazon requirements.

Summary page of all the defects found. For this order they found 16 major defects out of the 500 units tested. Although this is an acceptable result, I can probably expect a couple of bad reviews if people find dirty or cracked products.

This factory looks very shady. Not at all how they presented themselves on their website. In this case I will probably look for another factory for future orders.

I use Asia Inspection for this, and they are very professional. For a report like this they charge $309. Yes, 1 simple step that cost $309 could have saved my product that was making me $1500 per month! They also offer a couple of other inspection services:

If I had the second order inspected the batch would have failed the test as it would have to many defects. I could then have them redo the batch or I would simply not pay the remaining 70% of the balance. Therefor it is very important to have the inspection done while the products are still in the factory & before you pay the 70% balance. This way you have a very strong negotiating position in case they mess up the batch and you want them to redo it.

I see a lot of seller who ship the products to their home or warehouse from China. They will then inspect the goods in the US, before they send them to Amazon warehouses. To me this is absolutely ridiculous. What are you going to do if you find out they messed up the shipment? Ship all of them back to China and hope they will refund you your money? Chinese suppliers will definitely not refund or redo your shipment. Once you have 100% paid for it, it is your problem. Besides that, shipping the products back and forth from US -> China wouldn’t even be worth it.

2). Amazon Supplier Purchase Order Agreement

In order to make sure you and your supplier are on the same level it is smart to write down everything about the order in a purchase order agreement. I would pretty much write down every detail like:

  • Product info: dimensions, weight & material.
  • Carton info: Quantity per carton, size & weight of carton. For example make sure the cartons do not weigh more than 50 pounds, per Amazon requirements.
  • Product time & delivery date. And also what happend if the delivery date is not reached.
  • Shipping: Are you shipping the products FOB, EXW or use another Incoterm?
  • Payment: The norm is 30% upfront, 70% when product is finished and inspection accepted.
  • Inspection:
    • Date of inspection.
    • Maximum allowed of defects found in inspection.
    • What happens if the maximum of defects is exceeded? In some cases where the maximum is only slightly exceeded you might want to accept the risk and request a discounted price. If the batch is really messed up and there are loads of defects you want the supplier to completely redo the batch / the defective units.

I understand it can be complicated to setup this kind of document. You can use the template I use for free. Leave your email below and I will send you the download link.

Having your supplier agree & sign this document will give you foundation to fall back on in case they mess up the shipment. You can then alway refer back to this document and the terms they have agreed to.

 

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10 Comments

  1. Very good material here.
    Questions:
    1) You do all of this by writing back and forth to your supplier on Alibaba.com? Or you speak directly on phone / skype audio calls?
    2) Assuming the supplier has signed your doc. What gives that validity? I mean, who can enforce him to actually act by this agreement?

    1. 1. Yes almost all communication I do is via chat ( WeChat or Skype ). For emergencies I have their phone number and give em an call.
      2. You can enforce him by not paying the remaining 70% of the balance. In the agreement both parties agree that only the full amount will be paid if everything is in order. The supplier now knows & has agreed to it that if the defect rate will exceed x% he will not receive the 70%. If you don’t have agreements about this kind of stuff he will probably try to get out of with an excuse or something.

  2. Is there a chance that you were working directly with a trading company and not a manufacturer?

    This is one of my concerns. I have recently ordered some of my new product samples, and only now found out that my favorite supplier for this product is also a trading company.

    Now I am concerned that he will manage to send me a very high quality sample in order to make me close the deal, but then when producing the mass order, he will contact a cheaper factory. Let alone if I try negotiating with him on the price (and by that lowering his cut).

    Do you think It will be smart to include in your agreement template a section for matching the sample order quality or something?

    1. Yeah there is probably a good chance some of my suppliers are trading companies. But honestly I am ok with that. As they can probably communicate better with me, and as long as they offer the same price & quality product it’s ok for me. Of course the quality product like you said is the most important thing, as you don’t want to get screwed. So that is why I always do the inspection.

  3. Thanks for letting us know about this experience! I have a question about shipping. I am shipping my products via Air Express and Air Cargo, however, I don’t know where the products are supposed to be shipped to? When I try to create a shipping plan on Amazon it asks for Ship From location. I thought this was my supplier’s address but I read that it is not. What should this address be and how will I find it? In other words, where should my supplier mail my cartons to? Thanks for all your help!

    1. You can enter your suppliers address, or any address you like. This is just so they can calculate which FBA warehouse is closest to your origin destination.

  4. Thanks alot for your sharing.
    There are st that iam wondering:
    1. In every case, we always have a chance to lose 30% pay upfront. You know, supplier in china is unbelievable. If this happens few times again, we will lose alot of money.
    2. In case of having inspector from china, each time of inspection costs 309$. Assume that, if after the first time of inspection, the goods donot meet the quality, then the supplier will repaire or redo the new ones. So we have to need the inspector one more time again, it means the cost for inspection is doubled. As in 1, May we lose a lot of money if this happen many times again. Even that we will still haven’t had the goods ready for shipping to amazon yet.
    Look foward to hearing from you soon !

    Thanks alot,
    TrungN

    1. 1. If you select only gold suppliers on Alibaba, they will be more reliable. They have paid a huge amount of money for that gold badge, so they will likely not close shop as soon as they receive your 30%. You can also use Trade Assurance from Alibaba that will act like an insurance. Either way, in the almost 4 years that I buy from China now, I have never had it happen that I paid 30% and never heard from the supplier again.
      2. This depends on the order & situation. If it’s a big order ( like +$20k ) I will have the inspector recheck the whole production again. But if it is a small order and there are only a couple of defects I usually trust the supplier that he actually fixed the problem, and he usually sends me pictures as well.

  5. Ya. Thanks for your response. Valuable infos.
    Would u mind if i ask u one more question?
    – You know there is a commercial war between two powelful economic countries are china and usa. So any obstacles with people who do FBA like u in this time?
    – Have you other potential amazon market to do FBA. If you did, would u mind sharing some experiences ?

    Sorry for many silly questions. I as like u in 4 years ago, 24 and wanna to join FBA adventure journey. :))
    Look fw to hearing from u.

    Thanks in advance. !
    TrungN

    1. 1). Yes one of my products got hit with the import tax by Trump. 25% extra import tax. There some shady tactics to get around this: For example you can ask your Chinese supplier to give a lower value on your invoice for the customs.
      For example:
      – Normally your value of goods is: $10,000 * 0,25 import tax = $2,500 import tax you have to pay.
      – If you put value of goods $3,000 on the customs invoice * 0,25 import tax = $750 import tax you have to pay.

      I do not do this, or condone this. But this is a method that people use to get around the new import tax.

      2). I only sell on Amazon.com. But I have worked as e-commerce manager for a company how sold in Amazon Europe ( UK, DE, FR, IT ). The market is very small in Europe compared to US. And you have to pay local taxes, arrange stock per country etc. A lot of work for a very small market so I rather keep selling in US.

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