securesourcingThree keys to unlocking trust & safety

in your global sourcing standards

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contentsIntroduction

Executive Summary

Key I: Vetting Suppliers

Key II: Financial Considerations

Key III: Inspections & Audits

Alibaba.com Secure Sourcing

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introductionthe world is increasingly relying on cross-border suppliers for goods and services. For several years running, the import figures are on the rise from virtually every modernized Western nation importing from Asian, African andSouth 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 which figures are available,) imports from china into the United States totaled $365 billion. that figure is up a total of 841% from 1994, and accounts for approximately 19% of All U.S. imports.

And it’s not without good reason. china manufacturers are, for the most part,turning out some of the world’s finest (and most sought-after) goods in virtuallyevery category: electronics, computers, telephony, apparel, automotive andmany 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 profitable enterprise. but it’s not without significant 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? thisWhite Paper, prepared by Alibaba.com, will cover three distinct areas that cansignificantly increase the trust and safety levels in your sourcing operations.

Whether you’re a global procurement specialist at a large corporation or astartup entrepreneur, you need the benefit of tested advice and the insightsthat one of the world’s largest sourcing marketplaces can provide. these threekeys are the beginning of an improved protocol of secure global sourcing, whether you source at Alibaba.com or through any other means.

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executive summarytrust and safety have become touchstone issues surrounding internationalsourcing, paticularly when that sourcing is increasingly conducted through online marketplaces. With that in mind, Alibaba.com has prepared this WhitePaper to address the issues and provide three keys to embark on a path to moresecure sourcing standards.

three keys to improving safety throughout the sourcing process:

1. Vetting Suppliers is often the first and most important step to improvingsecurity in sourcing, particularly with the structure of Chinese business law.While there are dozens of practical methods to vet suppliers, a few standoutsprovide 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 specifics like moQinformation, sample orders and references

2. The most serious implications of trust and safety are financial. An understanding of the various payment methods that are available to yourorganization also helps to further vet your potential supplier. learn how tonegotiate with confidence, 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 confidence in sourcing. With a china-based partner like Alibaba, you can:

• receive verification audits and recognize common signs of potential scammers

• continue inspections right through the shipment process

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vetting suppliersthe first key

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vettingsuppliersit’s clear that the primary avenue to secure sourcing is paved with trustworthy suppliers. butdetermining the status of suppliers who are halfway around the world when budgets aretight 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 SupplierStep 1 of any verification process regarding suppliers should be a thorough review of thesupplier’s published information. if sourcing online, start with a search of the company,either on your sourcing platform or through any search engine.

Positive signs—indications that a supplier is a legitimate business and worthy of consideration— should include the following:

- A company profile, including a business license number- reviews published by other purchasers like you- Verifiable information, such as address, phone, contact information

not every legitimate business will stand up to these verification requirements. With so muchglobal commerce being driven through chinese businesses, it’s possible that a very legitimate and trustworthy supplier is in startup or expansion mode, and may not have manyreviews yet. So vet properly, but keep an open mind for some shortcomings that may beunderstandable given the industry and/or life cycle of the supplier.

negative signs—indications that a supplier may not be trustworthy or at least demands significant further investigation—may include the following red flags:

- A shoddy or incomplete company profile, with no business license number- negative postings from previous purchasers- A disparate offering 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 different contact name in a different country

conducting sufficient research before contacting suppliers should help you get to a shortlist of potential sourcing candidates. From there, you should continue vetting through thesecond consideration, which is being a shrewd shopper, even after making contact.

The SeConD DireCTiVe: geT your SupplierS To VeT ThemSelVeSif, after your initial vetting process, you’ve narrowed down to a shorter list of suppliers, itmakes 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 informationthat 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

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vettingsuppliers

The SeConD DireCTiVe: geT your SupplierS To VeT ThemSelVeS (ConT’D)by requesting these types of additional information, some suppliers will reveal themselves as questionable. For instance, if a supplier is offering a price that’s remarkablylower 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 gruffs at theprocess may be revealing themselves as a suspect supplier, or at the very least, a businesspartner with whom you may not want to conduct future transactions.

The ThirD DireCTiVe: CoVer All The DeTAilSinternational sourcing is a complex and multi-faceted process with layers of protocols andprocedures. As a result, there are many details that can get lost if both the buyer and thesupplier are not extremely careful and diligent. When vetting a supplier, make sure they arecomfortable discussing and outlining a process to cover all the details. these may include:

- customs regulations (tariffs, taxes, etc.)- international certifications- certifications regarding hazardous substances- Standardization compliances: Ul, UPc, etc.

While some of these items may not apply to your business, these details could mean thedifference between a smooth, successful transaction and a costly and lengthy process thatcould impact many aspects of your company.

Vetting suppliers is an important process for buyers of any size in virtually any part of theworld. For more information, resources and case studies on buying with confidence, youcan visit the Alibaba.com Safety & Security Center

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buyers who sourcedfrom Alibaba.comwithout complaint:99.98%

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

buyers from Alibaba.comwho reported complaints:.02%

financial awarenessthe second key

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financialawarenessthe most critical aspect of global sourcing trust and safety is the impact on your finances.Whether you’re purchasing a few hundred hockey sticks or a few million semiconductors,protecting your financial exposure is the most important key to a successful sourcing relationship. three directives to avoiding financial pain in your sourcing relationships:

The firST DireCTiVe: negoTiATe WiTh ConfiDenCeFor global sourcing, information isn’t just power - it’s the strongest negotiating tool. Afteryou’ve vetted suppliers and begin the selection process, the next phase is to ensure thatyou’re making the most advantageous financial decisions for each supplier, and througheach transaction. the key is to be informed about who you’ll be dealing with at every phaseof every deal.

in many cases, you may be dealing directly with the manufacturer. if this is the case, andyou’ve vetted the supplier, you should be able to discuss financial terms openly, and notworry about intermediaries. however, in some cases, an intermediary can be extremely beneficial 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 factoriesor from other traders, and may be able to actually save costs, since traders typically buy inquantity from manufacturers and can help you realize some efficiencies. Finally, you maycome across a sourcing agent, a third-party intermediary or broker who sources productsin a particular category or in a particular region. in many instances, you may set a price andthe sourcing agent will go and negotiate (usually with a margin) on your behalf.

negotiating with confidence is a combination of many factors: knowing what kind of partyyou’re dealing with, knowing the industry standards for the goods you’re sourcing and mostimportantly, understanding all the hidden costs.

The SeConD DireCTiVe: KnoW The hiDDen CoSTSStaying financially aware also implies a knowledge that you’re not just buying goods andservices, but also a host of other items that will facilitate your transaction. Knowing the hidden costs can help you project sourcing costs with confidence and also give you an additional advantage in your early stage negotiations. Some suppliers (while they may belegitimate 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 toglobal sourcing, and you’ll source more securely. Some hidden costs include:

- intermediary fees - traders and sourcing agents can add 5-10% premiums - moQ - be sure it’s not too high if you’re not ordering the minimums- Warranties and insurance - can be as high as 5-10% premiums- Various pre-purchase costs: certifications, quotes, samples- Various post-purchase costs: Fob price, freight issues, late fees

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financialawareness

The ThirD DireCTiVe: ChooSe The righT pAymenT meThoDthere are several methods for making and receiving payments in global sourcing. in manycases, substantial sums of money can change hands between two parties that have nevermet, and that anonymity element raises sufficient doubts about exposure and financial risk.both parties (buyer and seller/intermediary) want to secure as much guarantee about thefinancial efficacy of each transaction. Fortunately, the payment methods that are availablecover the spectrum of risk allocation between both parties:

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, oceanand multimodal.

For more information on incoterms and additional payment advice, you can visit the Alibaba.com Safety & Security Center

Payment method

t/t* or cash Advance

letter of credit (l/c)

escrow

Document Against Payment (D/P)

open Account

100% buyer risk

evenly Shared risk

moderate Supplier risk

100% Supplier/Seller risk

100% Supplier/Seller risk

risk Allocation

* telegraphic transfer (such as Western Union)

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audits & inspectionsthe third key

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audits&inspectionsto ensure the most secure sourcing available, it would be ideal to have ongoing monitoring capabilities at the points of manufacturing and fulfillment. however, since thiscan 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 guardagainst fraud and non-performance and to help you expedite your orders. Also note thatinspection services can be sourced directly through Alibaba.com.

Since factory audits are a part of the manufacturing and fulfillment culture in china, it is notconsidered a risk to request and even demand verification from your suppliers. most suppliers are usually eager to demonstrate that they are legitimate companies and to winyour confidence, and eventually, more business. two directives to consider:

The firST DireCTiVe: uSe An inSpeCTor To Verify The Supplier’S fACToryWhen an inspector steps in and begins a factory verification process, it becomes a long-tail continuation of the supplier vetting process. Whereas a few suspect suppliers mayhave managed to sneak through your vetting procedures, it is highly unlikely that they cancontinue to hide from a thorough inspection.

A factory verification 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 verification, which uses a visit to verify the form detail response

generally, the email survey and form detail will reveal any potential missteps, as a fraudulentparty simply cannot complete the form without being detected. however, the onsite visitcan 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 supplier’s quality of work, as thefactory audit can also include a Quality System Audit, which will detail several importantfactors, such as:

- management structure- Quality systems- Document control- inspection and testing- handling and Storage- And many other critical quality control issues

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audits&inspections

The SeConD DireCTiVe: ConTinue inSpeCTionS Through ShippingWhile a factory audit can improve quality and ensure reliability, the verification should continue through the shipping process. in fact, the most traditional kind of inspection thatis performed on exports from china is the final random inspection before shipment.

Using the statistical model of AQl (Acceptable Quality level,) inspectors can determine theoverall quality and accuracy of a shipment by testing a small percentage of the final 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 verification. 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 beprepared to include these fees in your overall procurement cost projections.

For more information on audits & inspections, visit the Alibaba.com Safety & Security Center

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securesourcingwithAlibaba.com is one of the world’s largest and most trusted global trade marketplaces. onour international sourcing sites, we strive to ensure the most secure sourcing standards to make your transactions smooth and safe. We are continually upgrading ourplatform and our policies to serve members and identify the very few who may seek to usethe platform for fraudulent activities. We have several programs to help protect buyers andsuppliers 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 limitfor Sea Freight delivery.

Authentication & Verification (A&V): All gold Suppliers go through an authentication andverification process to confirm their validity as a business establishment. A&V was upgradedin September 2011 to include onsite check, which is a physical validation of the place ofbusiness and their operations. We anticipate completing all onsite checks of our mainlandchina gold Suppliers before the end of october 2012.

Supplier Assessment (factory Audit): Alibaba.com also offers further verification servicesthrough Supplier Assessment reports. these are third-party audits focused on a company’s trade and production capacity, so buyers can understand if a supplier can meetfull production needs.

inspection Services: Alibaba.com has created a platform to search preselected groups ofvendors that can provide a variety of inspection services.

Blacklisting: Alibaba.com maintains a blacklist where the names of suppliers who have beenbanned from Alibaba.com for dishonest trade practices are openly published.

in addition to the policies above, Alibaba.com also cooperates with local authorities in theinvestigation and prosecution of fraud cases against Western importers. Please note that itremains 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

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sourcescited

A number of different 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 CommissionUS-china trade Statistics and china World trade Statistics

The office of the united States Trade representative

The uS-China Business Council