Manage overseas suppliers

You will find that there are various differences between trading within the UK and trading with overseas suppliers. Typically, these include language differences, new payment methods and increased paperwork requirements.

However, with a little research and planning these challenges are easily overcome. Widening your purchasing to the international market can give you a significant competitive advantage. Using overseas suppliers can lower your input costs and give you access to specialised goods and materials that may not be available in the UK.

This guide outlines the differences you need to take into account when starting to trade overseas. It takes you through the key steps in finding and selecting overseas suppliers, and explains what to look for in terms of payment methods and drawing up contracts.

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The challenges of sourcing overseas

Trading with overseas businesses differs from trading within the UK. New challenges are raised by the distances involved, by variations between countries, and by rules that govern international trading. 

Legal considerations

It’s not safe to assume that the same rules will apply overseas as in the UK, particularly when dealing with a country outside the European Union (EU). Factors to consider include:

• whether there are import or export restrictions at either end of the transaction
• whether technical standards in your supplier’s country meet UK requirements
• who is liable if a product causes harm or loss – see our guide on product liability
• whether your imported goods infringe any intellectual property rights
• who bears insurance costs at each stage of transit – see our guide on insurance for international trade

A well-drafted written contract will help to avoid disagreements or disputes. See the page in this guide on drawing up contracts with overseas suppliers.

Other considerations

There is a range of other factors you should bear in mind:

• Language differences matter. It’s not just a question of communication – make sure any labelling or other printed materials are error-free.
• Payment methods for international transactions are a bit more complicated. See the page in this guide on methods of paying overseas suppliers.
• Shipping procedures are also more complex, given the increased distances and the need to cross borders. See our guide on international transport and distribution.
• Understanding the business and social practices of your supplier’s country can help build trust and develop relationships. However, remember that UK consumers may judge you on the business practices of your suppliers. See our guide on researching and entering overseas markets.
• Think about how many suppliers you need. If you have too few you risk suffering supply-chain disruption if they have problems. If you have too many your managerial burden will increase.
• The origin of your goods can affect the level of duty you pay. Some goods attract a preferential rate of duty, so you need to check the source of your supplier’s raw materials. The best way to do this is to visit your suppliers – see our guide on rules of origin.

The EU Authorised Economic Operator certification scheme is aimed at reducing risks. For more information, see our guide on Authorised Economic Operators.

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Finding overseas suppliers

As with finding a domestic supplier, careful research is key to identifying overseas suppliers. You will have to identify countries to trade with, as well as individual suppliers within those countries.

Identifying suitable countries

For most goods and materials you can choose to import from a wide range of countries. Expect a trade-off between prices and levels of regulation and protection. Suppliers in developing countries may be cheaper but it may be more difficult to resolve any problems.

Factors that should influence your decision include:

• familiarity with the country – knowing your target country and having contacts within your sector there makes doing business easier
• communication – if you (or your employees) don’t speak the local language, check that English is widely spoken by businesses, or whether there are translators and interpreters available
• whether or not a country is a European Union (EU) member – if it is, many key regulations and standards will be similar to or the same as in the UK 
• level of development – it’s generally easier to trade with developed countries than developing ones
• how far away the country is – this affects shipping costs, the length of your trading cycle, and the ease of visiting suppliers, if necessary
• levels of existing trade with the UK – high volumes suggest other businesses have successfully chosen the route you’re considering

Identifying suitable suppliers

There are many sources of information about potential suppliers, including:

• your local UK Trade & Investment team – find your local international trade team on the UK Trade & Investment website- Opens in a new window
• trade associations for your sector – find trade associations for your industry on the Trade Association Forum website- Opens in a new window
• other importers in your sector
• banks’ trade services departments
• overseas trade visits and exhibitions
• the British Chambers of Commerce (BCC)
• your target countries’ embassy in the UK – find your target countries’ embassy on the Foreign & Commonwealth Office (FCO) website- Opens in a new window
• membership organisations for businesses trading between the UK and your source countries

Trade-services suppliers

Remember you may need secondary suppliers to help with the trading process, such as freight forwarders or import agents to handle shipping and customs-related formalities and documentation.

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Choosing an overseas supplier

You should have the same priorities in mind when selecting an overseas supplier as when choosing a UK-based one. You need to get the right price and quality, while making sure the supplier can be relied upon to meet high standards and delivery dates consistently.

The reliability of your supplier is crucial. While a competitive price is also important, make sure that low prices don’t come with unacceptable compromises on quality or on the level of service you’ll receive.

The main stages in the supplier-selection process are:

• drawing up a shortlist
• comparing the shortlisted suppliers on the basis of value for money, reliability and creditworthiness
• visiting the suppliers, if possible, to see their operations
• deciding which of the suppliers to work with

Value for money

Make sure that you’re happy with the price, quality and terms the supplier is offering. Get a written quotation. Any quotation should clearly state the terms of sale – ie how the shipping, insurance and associated transportation costs and any duty to be paid are to be allocated between you and the supplier. For more information on the standard international terms of sale, see our guide on International Commercial Contracts – Incoterms.

Ask for a sample based on your specification to make sure the supplier is capable of producing what you need.

Reliability

It’s important to research supplier reliability. If possible, visit the supplier. Look at their work and their production system.

Find out as much as you can about the supplier. Talk to:

• any UK references the supplier can give you
• UK importers with experience in the market
• trade associations and other importers in your sector
• member organisations for UK businesses trading with the market

You should also check the reliability of any sub-contractors to which your supplier may be outsourcing work.

Creditworthiness

Financial checks of overseas suppliers can be difficult due to a lack of accessible financial information. See if your bank’s international trade team can carry out a status query – a query into the company’s financial standing on your behalf.

Be cautious. Avoid advance payment or long-term contracts until you trust the supplier. See the page in this guide on methods of paying overseas suppliers.

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Building solid relationships with overseas suppliers

Trust is a crucial element of any supplier relationship. While it can take time and planning to build a solid relationship with overseas suppliers, doing so makes it more likely that you’ll increase business with them. It may even enable you to negotiate more favourable terms.

Build trust gradually

The key is to build the trading relationship slowly. Initially you should leave nothing to chance. Draw up written contracts that are clear and unambiguous. See the page in this guide on drawing up contracts with overseas suppliers.

Typically your initial contracts with a new supplier will be on a project-by-project or shipment-by-shipment basis. As the relationship develops you may move to longer contract periods and potentially be able to negotiate better terms.

An important part of building trust is learning how things work in your supplier’s country. Are there important cultural and social differences, or differences in the way business is done? See our guide on researching and entering overseas markets.

Communication

Communication is an obvious potential obstacle when dealing with overseas suppliers. Even simple actions such as routine telephone calls can be complicated by factors such as time differences and low-quality phone connections.

Face-to-face meetings are likely to be infrequent, but they can be vital to the trust-building process – so plan them carefully.

In addition, there are potential language barriers. Which language will you use with your supplier? Do you have enough foreign-language speakers in your workforce? Do these employees have the skills they’ll need to deal with your suppliers? Would it help to use local interpreters, especially for key meetings, to avoid misunderstandings?

Monitor, review and adapt

Make sure you monitor key aspects of the new supplier relationship. This will make it easy to identify areas for possible improvement.

Schedule progress reviews with the supplier. If there have been any problems, decide together how to resolve them. If everything has been working smoothly and profitably, you may want to extend the level of business you’re doing together.

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Methods of paying overseas suppliers

There are four main methods for paying overseas suppliers for the goods you import from them:

• Advance payment. The supplier only ships goods once they have received your payment.
• Letters of credit. Your bank guarantees to pay when presented with a set of specified export documents by the supplier – the bank guarantee increases the cost of this method. See our guide on letters of credit.
• Documentary collection. When goods are shipped, the supplier sends the export documents to your bank. You will need these documents to clear your goods through customs, but will only given them when payment has been made.
• Open account trading. The supplier ships goods to you directly, and asks for payment within an agreed period.

Minimise payment-related risks

For importers, the risk decreases as you move down the list above. Advance payment is the riskiest – there is a chance you’ll pay but never receive the goods. Open account trading is the least risky – you only pay after receiving the goods.

For exporters, however, the risk increases as you move down the list. So while you might prefer open account trading, your overseas supplier may want advance payment. Letters of credit and documentary collections offer some protection to both parties by involving their banks as intermediaries in the process.

The International Chamber of Commerce has established rules governing documentary credits worldwide. The Uniform Customs and Practice for Documentary Credits (UCP600) is a set of internationally accepted rules on the issue and use of letters of credit. These rules are commonly used by banks in commercial transactions worldwide and once applied to any documentary credit, they are binding on all parties to the credit, unless specifically modified or excluded by the credit.

Match payments to cashflow needs

Payment methods can have a major impact on your cashflow position. Most banks offer import finance packages to bridge the period between paying for your imports and receiving payment when you sell them on to your customers.

Bear in mind that payment methods and terms are frequently a matter of negotiation. For example, you might offer a supplier a letter of credit in return for an extended 75-day payment period to match your cashflow requirements.

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Drawing up contracts with overseas suppliers

There are many sources of potential confusion between an importer and an overseas supplier, from language difficulties to differences in business practices.

Drawing up a clear written contract is the best way to avoid problems. If disagreements do arise, they will be easier to resolve if you have a written contract rather than a verbal agreement.

Your contract should make all aspects of the trading process as clear as possible – what will happen, when it will happen, and exactly what each party is responsible for at each stage.

There are standard trading practices and systems to help you agree key issues. Incoterms are an internationally recognised set of trading terms used in contracts of delivery. See our guide on International Commercial Contracts – Incoterms. Special trade-related payment methods reduce the risks and uncertainties of international trade.

What to include

Key things to cover in a contract with an overseas supplier include:

• Goods. Specify what goods are being bought, noting any legal or technical rules with which they must comply.
• Price. How much will you pay? In which currency? At which exchange rate?
• Payment method. When and how will payment be made? See the page in this guide on methods of paying overseas suppliers.
• Delivery. How will the goods be transported to you? See our guide on international transport and distribution.
• Trading terms. Use Incoterms to specify exactly who is responsible for shipping costs, duties, and customs-related formalities. See our guide on International Commercial Contracts – Incoterms.
• Insurance. Be clear about who bears what risks – eg loss or damage – at each stage of the process. See our guide on insurance for international trade.
• Potential problems. Include procedures that would be implemented if a dispute arises, eg if one party’s error causes delays or losses for the other.
• Service level agreement. Define the level of service your supplier must provide.
• Legal jurisdiction of the contract. If there is a dispute, where would legal proceedings be heard?

Bear in mind that the contracts you agree with a supplier will evolve with your trading relationship. While early contracts might be on a shipment-by-shipment basis, longer-term contracts might follow as familiarity and trust develop.

If you’re agreeing a long-term contract, you can simplify the paperwork by applying for BTI (Binding Tariff Information) or BOI (Binding Origin Information). These give long-term clarification of the Tariff code or origin of your goods. Read about BTI on the HM Revenue & Customs (HMRC) website- Opens in a new window and read about BOI on the HMRC website.

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