With margins thinning in most industries, small companies are increasingly sourcing their products overseas in order to stay in business. We outline some tips and traps:

DO consider carefully if sourcing overseas is right for your business in the first place, says this Entrepreneur item. Remember that lower labor costs can easily be offset by the expenses related to moving production, notes Mike Lord, director of the Flow Institute for International Business at Wake Forest University in North Carolina. Among businesses that may be better off staying local: those with higher-value items and those that need a high degree of intellectual-property protection. And according to U.S. China Business Solutions, a consulting firm helping U.S. companies source in China, small and midsize companies should NOT source in China if their initial order will be below $200,000, given the upfront costs of hiring an agent, arranging shipping, acquiring samples, and traveling.

DO the math. According to Entrepreneur, once you’ve made the decision to source overseas, calculate what you can spend in order to make a profit. You should examine all aspects of your manufacturing to determine which parts are the most labor-intensive and could be outsourced, recommends Jennifer Adams, CEO of Velocity Source Group International, a consulting firm in Oakland, California, that helps entrepreneurs find factories in Asia.

DON’T hang on to preconceptions about other countries. That’s another piece of advice Entrepreneur got from Mike Lord of the Flow Institute for International Business. “You can’t assume things will be comparable to America,” Lord tells Entrepreneur. “You can’t even assume that all parts of a country will be the same.”

DON’T overlook industry research on suppliers. You can obtain this information from organizations like the Federation of International Trade Associations and trade groups within your industry. Also delve into U.S. government assistance programs.

DO enlist a consultant who can help you examine the pros and cons of the countries you’re considering and book appointments for you overseas. To get evaluations of consultants, check out your local trade organizations and chambers of commerce.

DO consider hiring an executive with some overseas experience–even if it wasn’t in the country you’ll be doing business in. “If [the executive] has had experience in another developing country, even Mexico, those soft skills and experience–dealing with red tape and corruption–are transferable,” Chris Runckel, president of Runckel & Associates, a Portland, Oregon, consulting firm, tells Entrepreneur.

DO immerse yourself in the local culture. Be sure to find out about the local customs and business practices of prospective countries, suggests Laurel Delaney, president of GlobeTrade.com, a Chicago company that helps businesses source and sell overseas. This way you can avoid faux pas like using aggressive negotiation tactics in Asia, where it’s more effective to be subtle and restrained.

DON’T forget to find out a source’s turnaround time. For many small businesses, which lack the clout of large companies, the ability to get things done quickly is key. For instance, Mia Abbruzzese, who runs her own shoe business, Boston-based Morgan & Milo, tells Entrepreneur: “I can’t dictate to my factories–being smaller, you don’t have that kind of control. So if I can find someone who can do it quickly, I can succeed.”

DON’T use a supplier who’s also a competitor. Hiring a source who has conflicting interests with your own leaves you vulnerable. Keep in mind that intellectual-property protection is often sorely lacking in Asia.

DO find a source who will accept an irrevocable letter of credit–a promise by a bank to pay the source–suggests Runckel of Runckel & Associates. Doing so will bring a bank’s oversight to the mix. Another type of financing is the bill of exchange. For smaller orders, however, paying in cash could help you secure better bargains.

DO pay attention to U.S. customs information to avoid snafus. For instance, Thad Hooker, who runs Spirit of Asia, a Florida company selling high-end furniture and accessories, shipped Thai pillows to the U.S. without realizing that they contained rice straw, which is banned here. “They (the Department of Agriculture) impounded all those pillows. We had to give a credit for [them]. It definitely hurt us,” he tells Entrepreneur. Hooker has since become a U.S. customs maven.

DO try to establish longer-term relationships and award reliable suppliers with constant business. “Showing the factory you can capture a lot of orders shows you have a future,” says Robert Kushner, president of Pacific China Industries, a novelty manufacturer with 20 employees, primarily based in Hong Kong. “Sometimes you take an order that doesn’t make you much money to keep your volume up.”

DO take precautions to protect your intellectual property. For example, Kushner tells the magazine that he keeps his own inspector inside Chinese factories. He also makes sure that no one supplier has the prototype for a valuable product, disseminating components across several factories. Only his most reliable supplier performs the assembly. Other ways to protect yourself: getting a source to sign a nondisclosure agreement or patenting the item in the source country itself.

DO provide your source with the exact model of what you want made. “It’s always better to cost something from an actual item rather than an idea of an item,” Adams of Velocity Source Group International says. You can get a form called an ATA Carnet from the U.S. government that allows you to import commercial samples duty-free.

DON’T underestimate the challenge of logistics. “Don’t assume that your source understands transport; you have to manage it yourself,” says Runckel. He recommends getting a top-notch freight forwarder, who has dealt with first-time importers before and can help you with the ins and outs of cargo, such as negotiating the necessary documents.

DON’T let a day go by without contacting your suppliers–either through e-mail or the phone–says Adams. Also, she tells Entrepreneur, “it’s super-important to show your face [in the source country].”

Some valuable resources:

Federation of International Trade Associations

GlobeTrade.com

Small Business Exporters Association

Stat-USA

U.S. Commercial Service Gold Key Matching Service

U.S. Export Assistance Centers

Source:

On Foreign Soil
Joshua Kurlantzick
Entrepreneur magazine, June 2005
www.entrepreneur.com/mag/article/0,1539,321420,00.html