Man holding a globe under his arm

Three ways to protect against global sourcing fraud

Local SMBs are turning to global sourcing at a growing rate to bring down the costs of doing business, which is blurring the defined borders of international markets. Sourcing internationally isn’t without risks though, which makes it important that businesses learn how to vet suppliers and improve their financial awareness.

More of today’s businesses are looking to global sourcing to expand, reduce cost margins and lessen the effects of an uncertain economic climate.

Global sourcing leader Alibaba.com sees over 21,000 new Australian users each month. In the month of May alone, over $20.7 million of merchandise were imported to Australia, an increase of $1.9 million over the month previous.

Of Alibaba.com’s 79.8 million registered users, less than 0.03 percent of users have reported fraudulent activity since December 2011.

To protect your business against global sourcing fraud, Alibaba.com has the following tips:

Vet your suppliers. Research, communication and evaluate:

1. Research Buyers should look at the potential supplier’s published information including company profiles, business license number, user-reviews and verifiable contact information. If these can’t be found, alarm bells should ring.

2. Communicate Once satisfied with a handful of potential suppliers, buyers can contact them and ask for further information such as their Minimum Order Quantity (MOQ), transaction details, and assess how long they take to reply. If responses are unprofessional, late or avoid answering questions, these are clear signs this supplier might not be the right one for your business.

3. Evaluate Once finalised to three potential suppliers, suppliers should request a sample from each one based on the product required. It is vital to have a product in hand to review, rather than order in bulk based on website images to ensure the quality is in line with their business.

Financial Awareness – negotiation, costs and payments

1. Negotiate with confidence Be informed about who buyers are dealing with at every stage, whether it is the supplier, manufacturer, trader or sourcing agent.

2. Know the hidden costs Be aware of costs such as intermediary fees, warranties and insurance, pre-purchase costs such as certification quotes and samples and post-purchase costs, such as the FOB price, freight issues and late fees.

3. Choose the right payment methodThere are several payment methods available which cover the spectrum of risk allocation between both parties. An open account or a document against payment method carries a 100 percent supplier/seller risk, Escrow is a moderate supplier risk, letter of credit carries an evenly shared risk, and T/T or cash advance is a 100 percent buyer risk. Both parties should agree on the best option with which they are both comfortable.

Audits and inspections

Fears of doing business overseas are normal, but shouldn’t keep small business owners from finding the right products for their business. If you’re still not comfortable, consider enlisting the services found through Alibaba.com’s Inspection Service to audit the supplier’s factory and the shipping process.

Other options include:

1. Supplier factory audit – Can expose a fraudulent supplier’s over-promising and reveal quality issues through a Quality System Audit.

2. Shipping audit – Using the AQL (Acceptable Quality Level) model, inspectors can determine the quality of a shipment. Other tests include safety and performance inspections, appearance and packaging inspections, LCL (less than Container Load inspections).

Related Stories