Posted on September 25, 2018
Updated on September 25, 2018
How to control a Chinese supplier’s behavior?
I received several emails recently from readers asking how they can increase their control over a Chinese supplier.
They experience late shipments, unacceptable quality, and/or price increases mid-way through production. Sometimes they get no response to their emails. They have the feeling that the supplier does not care about them.
How can a supplier’s behavior be controlled more effectively?
Buyers should work on their suppliers incentives and follow production closely.
And how to do it? I have listed 4 solutions below (1 “carrot” and 3 “sticks”).
1. Be seen as a “good customer”
If you want to control your supplier’s behavior, do not be associated with small and unprofitable orders… Because they are seldom given attention and priority.
The objective is to ensure that your suppliers take care of your current production because they are happy about it and they hope to get future orders. There are two things you can do:
• Make your orders look more appealing: don’t drive their profit margin down to zero; be clear in your requirements and keep development work easy (for example by providing a sample to copy); avoid overly complex breakdown of colors or sizes; do not be unfriendly in their presence, etc.
• Find suppliers who will value your business: your orders might seem insignificant to a large factory, so try to find a smaller manufacturer. It is important that top management keeps an eye on your orders.
2. Know what is really going on
If you let your supplier ship the goods without somebody checking quality on your behalf, you are running huge risks.
When it comes to consumer goods for Western countries, it is safe to estimate that the average Chinese exporter ships products that are inadequate–for one reason or another–at least 20% of the time.
If you cannot control quality by yourself, get assistance from an inspection company. They propose tools for different situations. Here are two of them:
• You should try to detect quality problems before shipment, because a container cannot be returned to the factory. So most serious buyers conduct a final random inspection, to confirm that quality is acceptable.
• And if you suspect the supplier is not doing a good job, you should catch the issues early (and avoid poor re-work and late shipping) with an inspection during production.
If you don’t know where to start with QC inspections, you can read four simple steps for starting to do quality control.
3. Tie payments to results
As long as you owe money to a supplier, it is much easier to control his behavior (since he risks a cancelled order or a request for discount).
Then, how to ensure that (1) quality is satisfactory, and (2) timing is respected? The solution is to settle final payment only after an inspection is passed AND the goods are shipped out. This is totally standard, and you should not hesitate to require it.
Let’s take an example. You write “Penalties for late shipment: 5% per week after promised ETD” on your P/O, and you negotiate to wire 70% of payment after shipment. In this case, the supplier will think twice before delaying your order.
Unfortunately, there are cases where this will not help you control your supplier:
• You give orders in a continuous flow, and you depend on your supplier for a good part of your business. In this case, try to work with several suppliers to minimize risks.
• You purchase products with no customization, and the supplier can easily sell them to somebody else.
To know more about this topic, you should read Paying by bank wire (T/T) and Paying by letter of credit (L/C)
4. Sign a contract
If you cannot follow the above recommendations, you can try to do business on familiar grounds: with a legally-binding contract.
There are lots of misconceptions. No, a purchase order is not a contract. No, Chinese suppliers are not used to signing contracts, and sometimes they don’t even read them. But yes, a contract can be enforced (in China only, except if the supplier has assets in your country) if it is drafted by a lawyer specializing in Chinese law.
A contract can give you more control over a supplier’s behavior, in many ways. If you approve a factory, it can discourage sub-contracting. If you have valuable intellectual property, it can prevent copying (or re-use for other buyers). If you are not happy about your supplier’s behavior, a demand letter from your lawyer might frighten him into cooperating.
Contracts are mostly used for big orders, or for very sensitive projects. My clients (SMEs buying from China) do not use any contract. And, from what I observed, mega-retailers have contracts but seldom enforce them–they rely heavily on the hope for repeat orders, on quality inspections, and on the fear of penalties.
What not to do
Equally important is what I did not mention in the above list. Let’s take an example: developing a personal relationship with a factory boss. It might help. But importers often think that it is sufficient, and they are mistaken.
That’s why so many local trading companies cannot control the behavior of the manufacturers they work with–even when they pretend to own the factory. Sometimes they have all wrong:
• The factory sees them as a bad customer, since they have access to so many other local manufacturers and they push prices down.
• If they have a personal bond with the factory boss, they don’t dare to inspect quality (to avoid making him “lose face”), and they wouldn’t even think of a contract.
• Their payment depends on the importer’s payment, so this element of pressure is somewhat lost.
This is good news for savvy importers. If they use the right tools, they can be very effective without the need for any intermediary.
Updated on September 25, 2018
Searching for a recognized and reliable overseas factory to manufacture your products is a lot easier and more effective when using a good sourcing agent (as opposed to searching for yourself).
This allows you to get more proactive in marketing your products and opening up new retail outlets (considering you now have someone managing your back-end).
Sourcing agents can aid in locating factories that are a perfect match to your needs. They can also help to better identify which suppliers will be punctual, provide efficient service and are trustworthy.
From there, you can be given an outline of the prices and how best they can be negotiated, a break down to how orders are placed, payments are taken and suppliers paid.
Another important function of your sourcing agent is to do proper inspection of factories to check that they have high standards and conditions. It is also important that you inspect your goods before having them shipped so that they are in good condition BEFORE they are put on the ship.
Terms and conditions of international trade sometimes sounds like ‘crazy-talk’ so sourcing agents sift through the clutter and define the policies and agreement that will become effective once you establish a business relationship with the overseas manufacturer.
Payment terms, duties, and other pre-requisite will be vital in determining what is expected so having a sourcing agent handle these aspects is an asset to your business.
Sourcing Agent fees Fees are relatively flexible to the amount of goods and services being purchased over a particular time.
Sometimes a flat fee for sourcing and manufacturing setup is charged, or a percentage fee (or a combination of the two).
Duties of a sourcing agent are basically 4-fold:
1.To guarantee you a trustworthy supply partner
2.To outline the agreements with your best interest at heart
3.To make sure the ensuing manufacturing runs like clock-work
4.To make you, the small business owner more comfortable and confident in your supply line so you can focus your attention on building yoru businesss
Once you choose a sourcing agent it’s also key that you become acquainted with the fact that this doesn’t mean you will be free to stop learning about your niche and the manufacturing processes involved.
It’s to your advantage to have a deep understanding and knowledge of your industry, and also the country in which you will be doing your manufacturing.
Industry trade shows are an ideal asset that you can use to strengthen your industry knowledge, and also aid in your search for a suitable sourcing agent.
When it comes to working with an in-country sourcing agent (one in your own country) or a local sourcing agent in the country of manufacturing, working with a local sourcing agent has its advantages in that some countries have better manufacturing capability making it convenient to have one source of contact who provides access to component suppliers and manufacturers of all types and can easly rotate or re-setup your manufacturing if needed.
It’s also a good idea to make sure that your overseas manufacturing representative or sourcing agent can speak your language fluently so that nothing is lost in translation.
Getting multiple pricing comparisons is a useful service of a sourcing agent. A good sourcing consultant is able to maneuver and negotaie efficiently due to their knowledge of the local factories, the ability to combine orders of other clients, and their understanding of what