It’s a little confusing when you first start sourcing suppliers on Alibaba, some will be listed as a manufacturer, some as a trading company and some as both. What makes it even more confusing is some suppliers will lie about being a manufacturer when they’re actually a trading company.
In this article, I’ll explain the key differences between trading companies and manufacturers, the benefits of each and which is the best to work with.
What is the Difference Between a Manufacturer and a Trading Company?
I think we all know that a manufacturer is a factory that produces the end product. But what exactly is a trading company on Alibaba?
Trading companies are middlemen between the manufacturer and the buyer. They specialize in sourcing products from various factories and reselling them to international retailers. They offer many benefits compared to manufacturers which is why buyers will often opt for them over manufacturers.
Trading companies work similarly to a wholesaler or a distributor in most Western Countries. If you’re in the United States, it’s not often you’ll source products directly from a manufacturer, usually, it’s through a wholesaler of some kind.
Although manufacturers produce the actual products themselves, they often source the materials and various components of the product. They don’t have every color for each component of every product on hand. Be aware of this as it can increase lead times.
Whilst manufacturers focus their business on producing products, trading companies focus their business on:
- Building relationships with several manufacturers
- Sourcing high quality products at the lowest prices
- Providing better communication when dealing with international buyers
- Having access to special lines
- Marketing their products
- Better all-round customer service
What is a Custom Manufacturer and a Multi-Speciality Supplier on Alibaba?
There are several different supplier types on Alibaba which make it very confusing. In this article, I am writing about the two main types which are manufacturers and trading companies. But you may have seen besides the “business type” in the supplier profile section, custom manufacturers and multi-specialized suppliers, so what are they?
Multi-specialty suppliers are the same as trading companies except they have undergone an audit and inspection by a third-party inspection company to verify they are who they claim to be. Essentially, a multi-specialty supplier is a verified trading company.
On Alibaba, a custom manufacturer is the same as a manufacturer except they have been verified by an inspection company.
Below are screenshots of suppliers on Alibaba that have been verified.
For companies to pay an inspection company to verify they are a legitimate business adds an additional layer of trust to the buyer and gives them a slightly more professional sounding business name.
It’s not essential that you work with a verified supplier but if you do just be aware that a custom manufacturer and a multi-specialty supplier are simply a new business title but essentially the same business. Throughout this article, I will refer to them as a trading company and a manufacturer to avoid confusion.
What is the Benefit of a Trading Company?
I understand most people searching on Alibaba want to avoid middlemen as much as possible and want to go directly to the source. Although a trading company will usually have higher prices than a manufacturer, there are several benefits that a trading company provides.
As a quick disclaimer, the benefits and drawbacks listed in this article are common for each supplier type. However, each supplier is different and they will vary, so don’t assume every trading company and manufacturer will have the same benefits.
1. Trading companies have lower MOQs
Trading companies will usually have lower MOQs (Minimum order quantity) compared to a manufacturer. This is especially important for your first order with a new supplier as you want to reduce your risk and test how the supplier performs before making a larger order.
Trading companies have built relationships with multiple manufacturers and can often negotiate better deals if required. They also work with a large number of customers and can often split the same product between multiple buyers which enables a lower MOQ.
For more info, I suggest you read my article on How to lower MOQ on Alibaba.
2. Better Communications
As a whole, you can expect faster and more efficient communication when you’re dealing with a trading company as opposed to manufacturers. A trading company’s entire business model is built around providing a more premium customer experience with International buyers.
Some manufacturers may not speak fluent English and will communicate via a translator app. A trading company should speak English and promptly respond to any queries you have.
3. More Product Variety
Most manufacturers don’t have a huge variety of products because they can only produce products that they can source the materials for, they have the right machinery and molds for and their staff is trained for.
Although trading companies specialize in specific niches, they tend to have a larger selection of products within that niche as they are sourcing goods from multiple factories. If you’re ordering multiple products, it can be much easier to work with a single trading company as opposed to multiple manufacturers.
4. Lead Times are Faster
Each manufacturer will have a slightly different process in place. Many will order the materials for their products from other factories before they can actually start production.
Trading companies will be in contact with multiple factories and can source the products at the fastest possible time or many trading companies will already have warehouses with the products in stock and ready to be shipped out immediately. However, this will differ between each trading company.
5. They Know the Best Manufacturers
It can be difficult for a person living in a Western country trying to source products from the best possible manufacturer in China. No matter how much research you do it can be a little risky.
Trading companies however are based in China and are very familiar with the manufacturers and how they operate. They will source from the factories that can provide them with the most benefits in terms of product quality, pricing, lead times and customization options.
6. Product Quality
If you’ve never worked with a manufacturer before you should always order samples at each phase of the production process. Samples are not cheap and may not be high quality meaning you’ll have to order more samples from other suppliers.
For more information, I recommend you read my article How to Order Samples from Alibaba the Right Way!
Trading companies perform their own quality control from multiple manufacturers and therefore work with whoever provides the best products at the best price. It does not mean a manufacturer has bad quality products, it means a trading company has the option to choose which products to sell.
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What is the Benefit of a Manufacturer on Alibaba?
There are fewer overall benefits to working with a manufacturer but they do outweigh many of the benefits of working with a trading company.
1. Product Pricing is Lower
This is the most obvious and the biggest reason why people choose to work with a manufacturer. As long as you source the right manufacturer, the product pricing should be lower than a trading company. It will vary but you can expect a trading company to add between 5% – 25% markup on the product cost.
This is not a deal breaker as paying an extra 10% for several benefits may be a worthwhile cost for your business.
2. Product Customization Options
This may be one of the most important reasons to work with a manufacturer. You can communicate directly with the factory and have them make changes, and alterations to improve the overall product.
This way you can create unique products that align with the brand you’re creating and help separate yourself from your competitors. With a trading company, you are selling the same products as other sellers.
A trading company can work with manufacturers to create custom products for you but they will take a cut, the MOQ will be high and you might as well communicate directly with the factory yourself.
3. Produce Higher Volumes
This may not be a concern in the beginning stages of your business as you’re after looking for a lower MOQ, however, when you start scaling your business it may be a huge benefit to work with a factory that can produce higher volumes.
Trading companies will often not have bulk inventory on hand and will need to source the products in bulk themselves which removes the benefits of a trading company.
Pros and Cons of Manufacturers and Trading Companies
| Pros/Cons | Manufacturer | Trading Company |
|---|---|---|
| MOQ | Higher MOQs | Lower MOQs |
| Product Pricing | Lower Pricing | Between 5% – 25% Higher |
| Product Selection | Smaller Product Catalog | Larger Product Selection |
| Scaling | The ability for Higher Volume | Potentially Limited Inventory |
| Product Quality | Varies Between Manufacturers | High Standard |
| Lead Times | Longer as They Produce the Goods | Faster than Manufacturers |
| Customization | Can Provide Product Customization | No Customization |
| Communication | Varies Between Manufacturers | High Quality Customer Service |
Is it Better to Work with a Trading Company or a Manufacturer?
The majority of people looking for suppliers to work with on Alibaba neglect Trading Companies and opt manufacturers. This is not always a wise decision and the best decision will often depend on your business needs.
Trading companies are a better option if you’ve never worked with a Chinese supplier before as they offer lower MOQs, faster lead times and excellent customer service. Manufacturers are better for buyers looking to go directly to the source, build a brand and scale their business with maximum profitability.
There is no right or wrong answer and it really depends on what you’re looking for as a business owner. It is more important to know who you’re working with so you know your supplier’s strengths and weaknesses. Some trading companies may actually claim to be a manufacturer when they’re really a trading company.
If you’re a complete beginner and this is your first time sourcing a supplier from Alibaba, I suggest working with a trading company. A trading company will provide a service that is more suitable to someone who is still working on a relatively small scale and will require better communication.
Working with manufacturers is a much more effective strategy if you’re looking to order huge volumes and private label your products. The extra cost per unit will add up fast when you’re looking to buy in bulk from a trading company.
Another thing to consider is payment options with suppliers. Generally, you should choose trade assurance when making any purchase on Alibaba as this is the most secure way to buy goods.
However, if you want to use alternatives such as Paypal, Stripe or Payoneer, usually trading companies are more likely to provide these payment gateways. At the same time, manufacturers are more likely to offer credit terms if you need any. If you require any of these payment terms I suggest you find out prior to making a purchase.
Why are Some Alibaba Suppliers Both Manufacturers and Trading Companies?
When searching through Alibaba you may have noticed that many suppliers list themselves as both a manufacturer and a trading company.
Many manufacturers do not have an export/import license and can therefore not ship their products internationally. It is a lengthy and complicated process to acquire an export license so often the smaller factories are less likely to have an export license.
In these cases, the factory often works with trading companies that can ship their products internationally. They act as a middleman which will naturally drive the cost of the product up for the buyer.
The manufacturers that also act as trading companies will have an export license. One thing to be aware of is when you search through their product catalog, not all the products they have listed will be the products they produced.
Because they work as both supplier types, they also order products from their competitors and stock them as their own. They are usually within the niche their producing products for.
So they are both producing some of their products as well as acting as a middleman and sourcing products from other factories. It may be worth asking exactly which products they actually manufacture in their factory. If they are simply acting as a middleman you may be paying higher prices than required and you won’t be able to customize the products.
Summary
If you’ve read through the entire article, I’m guessing I’ve either helped you decide which supplier is best to work with or I’ve confused you further. The important thing to be aware of is there is no right or wrong answer. It really depends on what you are looking for in a supplier.
What’s more important than working with a manufacturer or a trading company is what is the supplier like to work with. Are they reliable, trustworthy, honest and transparent?
As a beginner, there is no harm in working with a trading company initially to learn the ropes before transitioning to a manufacturer to help take your business to the next level.
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