How to Control a Chinese Supplier

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.