Trading Company or Manufacturer: What is the Best Choice?

by | Jan 20, 2021 | Sourcing

The coronavirus pandemic has accelerated e-commerce growth — it’s been forecasted that online sales grew by 32.4% in 2020. The types of products consumers are interested in have also shifted, with exercise bands, kayak accessories, kitchen furniture, and others seeing increased growth.

If you’re looking to capitalize on these trends, you need to find the right supplier for your product.

You may be searching for suppliers in China or another low-cost country. And if you’ve browsed Alibaba and other platforms, you’ve probably realized at some point that not all of the suppliers you find are factories — some of them are trading companies.

So what’s the difference between factories and trading companies, and how can you make the best choice for your situation? Here we answer these questions and provide some important considerations to help you decide.

What is the Difference Between a Factory and a Trading Company?

A factory is an industrial site where workers use specialized equipment and skills to make your product. They might use different manufacturing methods to turn plastic, metal, wood, or other raw materials into finished goods.

But a trading company doesn’t own a factory. Instead, they have a relationship with a factory — or perhaps they work with multiple factories that make their customers’ products. A trading company earns its money through a markup on the product.

So, you might be wondering why you would work with a trading company. Is it worth it to pay their markup?

There isn’t a single right answer to that question — it depends on the circumstances and whether the trading company is adding value. And trading companies can often provide additional value that makes the relationship worthwhile.

Trading Company or Manufacturer: 4 Considerations

While not all trading companies are great, if you find a good one, you can put yourself in a position to have more success as an importer. Let’s discuss some key considerations to help you decide whether to work with a trading company or manufacturer.

Consideration #1 – Communication and Customer Service

When you’re dealing with a supplier abroad, having clear lines of communication is important. One advantage of trading companies is that they’re often easier to communicate with. They may have people on staff that speak better English, and since they aren’t involved in manufacturing, they tend to be more customer-focused and put more effort into customer service.

If you’re communicating with factories and encounter communication difficulties, perhaps you can find a trading company that excels in this area. Another consideration is your experience with importing products from abroad.

Consideration #2 – Level of Experience With Importing

If you’re new to importing from China or Asia, working with a trading company can make things a little easier. It takes time to build a relationship with a factory, and since a trading company already has that relationship, you can benefit from it.

If you’re a small importer, getting some additional guidance and handholding from a trading company might allow you to save precious time and effort. Also, trading companies can sometimes save you money as well.

Consideration #3 – The Cost of Your Product

Of course, you want to get the lowest price possible, whether you’re working with a trading company or factory. You might assume that since trading companies are adding a markup that they’ll give you a higher price.

This isn’t always the case — if they already have a long-term relationship with the factory, they may be able to get better pricing than you would. They likely buy high volumes across all their different customers and can achieve economies of scale. If you’re a newer importer, you may not be ordering high volumes.

Consideration #4 – The Size of Your Orders

One of the first things Vietnamese, Indian, and Chinese factories will ask you about is your order quantity. If your order does not meet their MOQ (minimum order quantity), you may be out of luck.

For importers ordering in low volumes, a trading company can be a better choice since they already order large volumes from their factories and may be able to offer you a lower MOQ. They may also be able to offer you a wider variety of products allowing you to place a mixed order.

In the end, your unique situation and the specific companies you‘re talking to will determine which option is best.

Look at the Value Proposition and Your Goals to Make the Best Choice

While trading companies add a markup to the cost of the products they get from the factory, they can sometimes offer additional value that makes it worthwhile. As a buyer, you need to consider whether a particular trading company is adding enough value to make ordering from them the right decision.

Trading companies often make good partners for newer or smaller importers — that’s not to say that they can’t be ideal for experienced importers either. But it’s best not to get too hung up on labels, and instead look at value.

Try to determine what value the trading company is offering and use that information to determine the right choice.

You might also consider working with a sourcing agent to help you find suppliers that fit your needs. For more information about sourcing agents, we recommend that you read our guide, What is a Sourcing Agent?.

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Free Download: What is a Sourcing Agent?

Top brands are using sourcing agents to streamline their manufacturing processes, keep their costs low, and deliver quality products to their customers – in less time.

There are good sourcing agents and there are bad sourcing agents. So, what makes the difference? How do you distinguish between good and bad?

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