An AlibAbA.

com White PAPer

mAy 2012

securesourcing
Three keys to unlocking trust & safety in your global sourcing standards

contents
Introduction Executive Summary Key I: Vetting Suppliers Key II: Financial Considerations Key III: Inspections & Audits Alibaba.com Secure Sourcing Sources 2 3 4 7 10 13 14

introduction
the world is increasingly relying on cross-border suppliers for goods and services. For several years running, the import gures are on the rise from virtually every modernized Western nation importing from Asian, African and South American suppliers. in the United States alone, the amount of imports is rising on roughly a 20% average, year-on-year. As an example, in 2010 (the last year for w hich gures are available,) imports from china into the United States totaled $365 billion. that gure is up a total of 841% from 1994, and accounts for approximately 19% of All U.S. imports. And its not without good reason. china manufacturers are, for the most part, turning out some of the worlds nest (and most sought-after) goods in virtually every category: electronics, computers, telephony, apparel, automotive and many other business verticals. So are other Asian manufacturers in india, indonesia, malaysia, thailand and russia. As businesses are quickly learning, importing from china and other Asian nations can be a protable enterprise. but its not without signicant risks. Sourcing from overseas can be professionally hazardous, as front companies and scam operations have proliferated to cash in on the increasing global trade. So how does the modern business go about sourcing from overseas while protecting their investment, their stakeholders and their brands? this White Paper, prepared by Alibaba.com, will cover three distinct areas that can signicantly increase the trust and safety levels in your sourcing operations. Whether youre a global procurement specialist at a large corporation or a startup entrepreneur, you need the benet of tested advice and the insights that one of the worlds largest sourcing marketplaces can provide. these three keys are the beginning of an improved protocol of secure global sourcing, whether you source at Alibaba.com or through any other means.

Secure Sourcing | May 2012 | 2

SecUre SoUrcing

mAy 2012

executive summary
trust and safety have become touchstone issues surrounding international sourcing, paticularly when that sourcing is increasingly conducted through online marketplaces. With that in mind, Alibaba.com has prepared this White Paper to address the issues and provide three keys to embark on a path to more secure sourcing standards. three keys to improving safety throughout the sourcing process: 1. Vetting Suppliers is often the rst and most important step to improving security in sourcing, particularly with the structure of Chinese business law. While there are dozens of practical methods to vet suppliers, a few standouts provide the most return on your time investment: research suppliers using resources like Alibaba.com to verify their credibility be on the lookout for the obvious warning signs Ask for information that further vets the supplier, including specics like moQ information, sample orders and references 2. The most serious implications of trust and safety are nancial. An understanding of the various payment methods that are available to your organization also helps to further vet your potential supplier. learn how to negotiate with condence, and ensure that your supplier is a legitimate business partner through these core guidelines: Understanding hidden costs in procurement and international sourcing be certain that all regulatory standards are met, and that the products you ultimately purchase can be re-sold in your country Use the payment method that makes the most sense for you and your organization, while also providing maximum and mutual protection 3. Audits and inspections of suppliers are critical to ensuring long-term condence in sourcing. With a china-based partner like Alibaba, you can: receive verication audits and recognize common signs of potential scammers continue inspections right through the shipment process

Secure Sourcing | May 2012 | 3

the rst key vetting suppliers

SecUre SoUrcing

mAy 2012

vettingsuppliers
its clear that the primary avenue to secure sourcing is paved with trustworthy suppliers. but determining the status of suppliers who are halfway around the world when budgets are tight and deadlines are tighter can be a practical challenge indeed. the key to vetting suppliers involves three important directives. The firST DireCTiVe: reSeArCh your poTenTiAl Supplier Step 1 of any verication process regarding suppliers should be a thorough review of the suppliers published information. if sourcing online, start with a search of the company, either on your sourcing platform or through any search engine. Positive signsindications that a supplier is a legitimate business and worthy of consideration should include the following: - A company prole, including a business license number - reviews published by other purchasers like you - Veriable information, such as address, phone, contact information not every legitimate business will stand up to these verication requirements. With so much global commerce being driven through chinese businesses, its possible that a very legitimate and trustworthy supplier is in startup or expansion mode, and may not have many reviews yet. So vet properly, but keep an open mind for some shortcomings that may be understandable given the industry and/or life cycle of the supplier. negative signsindications that a supplier may not be trustworthy or at least demands signicant further investigationmay include the following red ags: - A shoddy or incomplete company prole, with no business license number - negative postings from previous purchasers - A disparate oering of products, such as electronics AnD apparel AnD medical supplies AnD industrial goods - A supplier who wants to rUSh you through the purchasing process - A supplier who wants to use t/t or Western Union as only payment methods - A supplier who asks you to pay a dierent contact name in a dierent country conducting sucient research before contacting suppliers should help you get to a short list of potential sourcing candidates. From there, you should continue vetting through the second consideration, which is being a shrewd shopper, even after making contact. The SeConD DireCTiVe: geT your SupplierS To VeT ThemSelVeS if, after your initial vetting process, youve narrowed down to a shorter list of suppliers, it makes sense to initiate contact and begin asking for additional information. At this point, you can try to contact suppliers directly. When making your initial contact with potential suppliers, follow some basic steps to obtain further objective and actionable information that will aid in your decision-making process. - Ask for more information about the supplier (website, contacts, etc.) - Ask if they will agree to a small trial order or sending samples - obtain moQ (minimum order Quantity) information - Ask for references
5

SecUre SoUrcing

mAy 2012

vettingsuppliers
The SeConD DireCTiVe: geT your SupplierS To VeT ThemSelVeS (ConTD) by requesting these types of additional information, some suppliers will reveal themselves as questionable. For instance, if a supplier is oering a price thats remarkably lower or higher than the industry standards, this could be a sign of danger. Further, if a supplier is overly eager to move you to a sale without completing your due diligence requests, you may recognize this as a clear warning. these types of questions and answers between potential buyers and suppliers are standard operating procedure in international sourcing. Any supplier who grus at the process may be revealing themselves as a suspect supplier, or at the very least, a business partner with whom you may not want to conduct future transactions.

The ThirD DireCTiVe: CoVer All The DeTAilS international sourcing is a complex and multi-faceted process with layers of protocols and procedures. As a result, there are many details that can get lost if both the buyer and the supplier are not extremely careful and diligent. When vetting a supplier, make sure they are comfortable discussing and outlining a process to cover all the details. these may include: - customs regulations (taris, taxes, etc.) - international certications - certications regarding hazardous substances - Standardization compliances: Ul, UPc, etc. While some of these items may not apply to your business, these details could mean the dierence between a smooth, successful transaction and a costly and lengthy process that could impact many aspects of your company. Vetting suppliers is an important process for buyers of any size in virtually any part of the world. For more information, resources and case studies on buying with condence, you can visit the Alibaba.com Safety & Security Center

Alibaba.com Sites 2011 user-reported Statistics: 25.5 million registered users

buyers who sourced from Alibaba.com without complaint: 99.98%

buyers from Alibaba.com who reported complaints: .02%

the second key nancial awareness

SecUre SoUrcing

mAy 2012

nancialawareness
the most critical aspect of global sourcing trust and safety is the impact on your nances. Whether youre purchasing a few hundred hockey sticks or a few million semiconductors, protecting your nancial exposure is the most important key to a successful sourcing relationship. three directives to avoiding nancial pain in your sourcing relationships: The firST DireCTiVe: negoTiATe WiTh ConfiDenCe For global sourcing, information isnt just power - its the strongest negotiating tool. After youve vetted suppliers and begin the selection process, the next phase is to ensure that youre making the most advantageous nancial decisions for each supplier, and through each transaction. the key is to be informed about who youll be dealing with at every phase of every deal. in many cases, you may be dealing directly with the manufacturer. if this is the case, and youve vetted the supplier, you should be able to discuss nancial terms openly, and not worry about intermediaries. however, in some cases, an intermediary can be extremely benecial to help cover many details, particularly on the supplier side of the deal. A trader (sometimes an intermediary, sometimes a supplier) will necessitate some additional costs, but in some cases, you may only be dealing with a trader who buys directly from factories or from other traders, and may be able to actually save costs, since traders typically buy in quantity from manufacturers and can help you realize some eciencies. Finally, you may come across a sourcing agent, a third-party intermediary or broker who sources products in a particular category or in a particular region. in many instances, you may set a price and the sourcing agent will go and negotiate (usually with a margin) on your behalf. negotiating with condence is a combination of many factors: knowing what kind of party youre dealing with, knowing the industry standards for the goods youre sourcing and most importantly, understanding all the hidden costs.

The SeConD DireCTiVe: KnoW The hiDDen CoSTS Staying nancially aware also implies a knowledge that youre not just buying goods and services, but also a host of other items that will facilitate your transaction. Knowing the hidden costs can help you project sourcing costs with condence and also give you an additional advantage in your early stage negotiations. Some suppliers (while they may be legitimate providers,) recognize the hidden factors of sourcing and seek to capitalize on the inexperience of some global buyers. be aware of all the costs related to global sourcing, and youll source more securely. Some hidden costs include: - intermediary fees - traders and sourcing agents can add 5-10% premiums - moQ - be sure its not too high if youre not ordering the minimums - Warranties and insurance - can be as high as 5-10% premiums - Various pre-purchase costs: certications, quotes, samples - Various post-purchase costs: Fob price, freight issues, late fees

SecUre SoUrcing

mAy 2012

nancialawareness
The ThirD DireCTiVe: ChooSe The righT pAymenT meThoD there are several methods for making and receiving payments in global sourcing. in many cases, substantial sums of money can change hands between two parties that have never met, and that anonymity element raises sucient doubts about exposure and nancial risk. both parties (buyer and seller/intermediary) want to secure as much guarantee about the nancial ecacy of each transaction. Fortunately, the payment methods that are available cover the spectrum of risk allocation between both parties: Payment method t/t* or cash Advance letter of credit (l/c) escrow Document Against Payment (D/P) open Account
* telegraphic transfer (such as Western Union)

risk Allocation 100% buyer risk evenly Shared risk moderate Supplier risk 100% Supplier/Seller risk 100% Supplier/Seller risk

Another subset of payment terms is incoterms, a set of internationally accepted standards developed by the icc (international chamber of commerce) that seek to reduce uncertainties around rights and obligations, mostly with respect to delivery agreements. there are 15 incoterms that cover the various transport modes: rail, Air, ocean and multimodal. For more information on incoterms and additional payment advice, you can visit the Alibaba.com Safety & Security Center

the third key audits & inspections

10

SecUre SoUrcing

mAy 2012

audits&inspections
to ensure the most secure sourcing available, it would be ideal to have ongoing monitoring capabilities at the points of manufacturing and fulllment. however, since this can pose a logistical challenge, particularly since many suppliers are located across great distance from most buyers, the next best option is to source an inspection protocol. luckily, there are audit resources available in china. independent experts are available to help guard against fraud and non-performance and to help you expedite your orders. Also note that inspection services can be sourced directly through Alibaba.com. Since factory audits are a part of the manufacturing and fulllment culture in china, it is not considered a risk to request and even demand verication from your suppliers. most suppliers are usually eager to demonstrate that they are legitimate companies and to win your condence, and eventually, more business. two directives to consider: The firST DireCTiVe: uSe An inSpeCTor To Verify The SupplierS fACTory When an inspector steps in and begins a factory verication process, it becomes a long-tail continuation of the supplier vetting process. Whereas a few suspect suppliers may have managed to sneak through your vetting procedures, it is highly unlikely that they can continue to hide from a thorough inspection. A factory verication includes pre-visit information gathering and then an onsite inspection. this typically includes the following: - A preliminary email survey form, which is standard operating procedure - A form detail, which ascertains detailed equipment information - onsite verication, which uses a visit to verify the form detail response generally, the email survey and form detail will reveal any potential missteps, as a fraudulent party simply cannot complete the form without being detected. however, the onsite visit can then drill down into non-performance issues, such as over-promising on equipment, size of workforce and shipping capabilities. Further, you can determine more information about the suppliers quality of work, as the factory audit can also include a Quality System Audit, which will detail several important factors, such as: - management structure - Quality systems - Document control - inspection and testing - handling and Storage - And many other critical quality control issues

11

SecUre SoUrcing

mAy 2012

audits&inspections
The SeConD DireCTiVe: ConTinue inSpeCTionS Through Shipping While a factory audit can improve quality and ensure reliability, the verication should continue through the shipping process. in fact, the most traditional kind of inspection that is performed on exports from china is the nal random inspection before shipment. Using the statistical model of AQl (Acceptable Quality level,) inspectors can determine the overall quality and accuracy of a shipment by testing a small percentage of the nal load. other inspections can include inspections at loading to match the cartons or containers prepped for shipment with the contract, that are then sealed for further verication. other post-factory/pre-shipment inspections can include: - Safety & Performance inspections - Appearance & Packaging inspections - lcl (less than container load) inspections note that the buyer is typically responsible for covering the costs of such inspections, so be prepared to include these fees in your overall procurement cost projections. For more information on audits & inspections, visit the Alibaba.com Safety & Security Center

12

SecUre SoUrcing

mAy 2012

securesourcingwith
Alibaba.com is one of the worlds largest and most trusted global trade marketplaces. on our international sourcing sites, we strive to ensure the most secure sourcing standards to make your transactions smooth and safe. We are continually upgrading our platform and our policies to serve members and identify the very few who may seek to use the platform for fraudulent activities. We have several programs to help protect buyers and suppliers alike: escrow payment on Alibaba.com: We have recently introduced eScroW payment on Alibaba.com for select purchases up to US$10,000 for Air express delivery and with no limit for Sea Freight delivery. Authentication & Verication (A&V): All gold Suppliers go through an authentication and verication process to conrm their validity as a business establishment. A&V was upgraded in September 2011 to include onsite check, which is a physical validation of the place of business and their operations. We anticipate completing all onsite checks of our mainland china gold Suppliers before the end of october 2012. Supplier Assessment (factory Audit): Alibaba.com also oers further verication services through Supplier Assessment reports. these are third-party audits focused on a companys trade and production capacity, so buyers can understand if a supplier can meet full production needs. inspection Services: Alibaba.com has created a platform to search preselected groups of vendors that can provide a variety of inspection services. Blacklisting: Alibaba.com maintains a blacklist where the names of suppliers who have been banned from Alibaba.com for dishonest trade practices are openly published. in addition to the policies above, Alibaba.com also cooperates with local authorities in the investigation and prosecution of fraud cases against Western importers. Please note that it remains critical to conduct due diligence before entering into any transaction with any supplier, whether or not they are sourced through Alibaba.com. For additional tools to help you trade safely, visit the Alibaba.com Safety & Security Center

13

SecUre SoUrcing

mAy 2012

sourcescited
A number of dierent sources were used for data and reporting in this White Paper. Alibaba.com iSm (institute for Supply management) February 2012 manufacturing iSm report on business u.S. Department of Commerce uS international Trade Commission US-china trade Statistics and china World trade Statistics The oce of the united States Trade representative The uS-China Business Council

14