First, let us address how to set up your payments so that you are not exposed to problems.
In the opinion of Sophie Mao of www.chibridge.net, my lawyer in China, "The best way to protect yourself is to structure your payment terms so that payment and quality of the goods are linked. Make sure to keep the deposit as small as possible and do not make the remaining payments until you or a third party inspection agent has checked the goods."
This is why she always recommends to her clients, if they cannot get something like 30/70, then there is no deal. Of course, the better option is about 30/30/40. Meaning, the initial deposit is 30 percent, another 30 percent after the preshipment inspection and 40 percent after delivery in the destination country.
For those readers who did not know about the strategies above, and who have paid the suppliers in advance yet have not received the goods, unfortunately there is no effective "Better Business Bureau" in China where you can take your grievances. Also, you will find limited support from government agencies, unless your case has pressure from your government's agency on its China counterpart. That pressure can actually work, but is very hard to arrange unless you have high level government contacts back home already.
Hope is not lost, though. Here are some tips to get your product shipped or your money back.
If you have the following items in place, then there is a decent chance of negotiating a resolution that is acceptable:
A signed or chopped contract that defines clearly the acceptable level of quality.
A clear paper trailing showing proof of payment.
The seller named on the contract matches the receiver of the payments. (With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company).
Your supplier has physical and financial assets (small "one-man-bands" disappear as soon as they feel a lawsuit is on the way).
The jurisdiction on the contract matches the location of the supplier's assets at a city, province or country level.
It is always nice to have future orders you can leverage as well.
Also, before placing the PO did you or a third party do an audit or due diligence at the factory to confirm they were legitimate? If yes, keep that report on file as you may need to refer to it later.
Here are my suggested next steps if you are not getting anywhere resolving a dispute with your supplier.
- The first step is to define the damage and put a value on the costs to repair or replace.
- The second step is to negotiate with your supplier on your own.
If that fails, many buyers think going to court or issuing a demand letter is the next best step. But actually, bringing in a third party can help facilitate dispute resolution.
Keep in mind that a demand letter or threat of court action can lead to a complete communication breakdown. Once this letter is sent, walls are put up by the supplier and getting to the facts of the situation becomes very difficult. In many cases they simply stop responding to the buyer and "call the bluff" if they suspect you are not willing to go to court, which is often the case when the orders are small or the five items mentioned above are not in place.
Bringing in a third party to help mediate after the legal letters have been sent out makes it very hard for this agency to be effective as any goodwill on the sell side has been lost.
If the third-party negotiations are not successful, then consider getting an English-speaking China lawyer to write a demand letter.
Unlike most other nations, in China you can sue for lost revenue. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can be effective.
Often buyers are focused on saving money, but it is equally important to find ways to save time. What can we do to keep projects moving forward on schedule?
To answer your question, I would like to paraphrase some points made by my friend Whit Kelly on the subject. In a blog post he gives four common reasons for delays:
1. Incomplete design databases
This is the almost common causes of delays. As I mentioned in some of my blog writings, you really need to have all the elements of the design finalized before going to production. Leaving even the smallest element open to interpretation will lead to the supplier rendering it in the way exactly opposite from what you wanted.
2. Payment delay
China is pretty close to a cash economy unless you are a buyer for a Fortune 500 company. All purchase orders will require a deposit, in most cases because the manufacturer is going to use that money to pay cash for the raw materials. Tooling is typically 30 percent at time of order, 40 percent at first article and 30 percent at final approval, before delivery. Production is most often 50 percent at time of order and 50 percent at time of shipment, which means in practice, 100 percent is due before the product leaves the factory. All these terms are clearly communicated early in the project, but at least 80 percent of the time, there are delays from clients not paying in a timely fashion.
3. The uncommunicative buyer
It is not uncommon for projects to get caught in the doldrums and go nowhere for days, weeks, even months because the client is AWOL. It is very, very common to play "hurry up and wait."
4. The buyer who is in a hurry
While this might seem to be the right attitude to keep things moving fast, the buyer who is in a hurry often places speed over accuracy. They want to cut corners, skip prototypes, skip writing a Product Quality Manual, not bothering to proofread the PQM, etc. Sometimes this works out, but not often. More commonly when you deviate from the normal project flow, you end up causing more delays.
China vendors mess up all the time, but the delay is not all the vendors' fault as the four common pitfalls above explain.
Luckily, it is easy for buyers to avoid these pitfalls if they want to keep sourcing projects moving forward on schedule.
The most important step is to make sure your supplier can actually achieve your desired level of quality in the first place.
Only through physical inspection of the factories and a review of actual production samples will you gain a true understanding of your supplier's ability. If you are unable to make the trip yourself, there are independent agents that can assist with this qualification and analysis process.
Always see an actual production sample from the actual supplier. It may sound simple, but you would be surprised at the number of so-called suppliers that are actually trading companies farming out production to partner factories without full disclosure to the buyer. This creates an additional level of margins. More importantly, should a problem in quality arise, the lines of communication are complicated by middlemen.
Ask the supplier to provide their internal QC documentation. For example, stipulating that the supplier's testing and inspection data accompany the shipment will let them know you are serious about quality.
Employ local QA inspectors and independent laboratories. Not realizing that companies provide independent inspection services at affordable rates, some buyers wait until the goods arrive at the destination to perform an inspection.
Even if your payment terms are structured to limit your financial exposure in that final payment is made after inspection, should you run into a QC issue after the goods have arrived at the destination, you still have the headaches associated with missed delivery dates, negotiations of corrective action, and costs of scraping or returning the goods to China. It is always a good idea to inspect the goods before they leave China.
The steps to making sure the quality of goods received is according to contract are follows:
Most important, but often overlooked by new buyers, is to make sure your contact or purchase order given to the factory states the specifications clearly and is fully understood by the factory.
Confirm that the factory is using these specifications for their internal QC.
The checklist for the independent inspector should match up with the specifications found in the original contract/purchase order.
First, I would like to offer some comments for your consideration in regards to middlemen and factory representatives. There are good and bad ones. The good ones add legitimate value, the bad ones cause problems. To determine who is legitimate, the single most powerful question you can ask is, "Can I speak to a few references."
If they cannot give you a handful of legitimate clients, run away. Having an intermediary is not always a bad thing, but let us assume you want to go the factory directly for whatever reason, then here are some red flags that you may be dealing with a middleman:
Avoid those that refuse to list the name or location of the production facility.
Focus on those factories that can clearly show manufacturing experience with your particular model or production method. They should have samples and quality documents readily available if they are a real factory.
If you are able to arrange a factory visit, do your contact's business cards match the factory staff's information? If the cards do not match in name, color and address, then your contact is probably a middleman.
Do the people at the factory clearly know your contact or does he give out business cards to factory staff when giving you the tour of "his" factory? At worst case this may be his first time working with the factory and you may as well build your own relationship without him.
Look for clear information about operation size, equipment and staffing on the website. Most intermediaries do not offer the same level of detail that real factories present.
Be wary if they supply a very large range of products. If they say they make toothbrushes and TV sets, most likely one or both are outsourced.
Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.
Ask for ownership papers of the factory. By law, the business license should be hanging from a wall in an easy to see location. Granted, it is often in Chinese, but get a copy (and make sure the copy you are given matches the one on the wall) and later you can translate the Chinese to show valuable information like ownership, years in business, scope of business and such.
Be explicit that the production location may be audited by you or a third party, and that this location cannot be changed without approval from the buyer. You will be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poor quality option after the buyer leaves.
Thanks to resources such as Global Sources, it is pretty easy to come up with a long list of potential suppliers. But it is not so easy to take this long list and narrow it down to the right suppliers for your particular needs. So here is my strategy to help.
First, write down on paper what you think your ideal supplier would look like. For example, do they have access to a certain raw material, are they ISO-certified, are they verified suppliers, do they have X number of employees, do they produce X amount of goods per year and so on. The dream supplier will be different for every buyer so write down what is important for you.
Second, compare the website or brochures from your list of potential suppliers against the attributes of this "ideal supplier" and create three piles: "No way," "Maybe" and "Looks good."
Be very conservative as you decide to place a supplier in the "Looks good" versus "Maybe" pile. Generally speaking, the websites and brochures offer you a best case scenario in terms of capability and experience of the factory. Sales and marketing people anywhere in the world tend to overpromise and underdeliver.
For example, the website may say a supplier can produce 1,000 units an hour. That may be true in theory, but perhaps due to common power outages or required maintenance on equipment, they average only 700 units an hour.
If a supplier does not look great on the website, it probably will not look great in reality and you should put it in the "Maybe" or "No way" pile. Keep in mind, our goal is to narrow the large pool of potential suppliers down to a handful of qualified ones, so be strict and do not be afraid to fill up the "No way" and "Maybe" piles.
Note that we have not yet contacted the suppliers to ask about price. Do not do that just yet, because as soon as you do, you will subconsciously be attracted to the supplier that has what appears to be the best price, and it is very rare that the lowest price supplier also has the quality or lead time or other attributes your "dream supplier" would have. It is far more effective to narrow down the pool to a handful of highly qualified suppliers, then start to talk price.
After narrowing down a list of potential suppliers from a few hundred to five or less, you should contact the suppliers and conduct the RFQ or request for quotation. Their feedback should allow you to narrow down the list further to only the top two or three based on pricing and nonprice attributes.
The next step is to validate if the suppliers are legitimate. There are two essential types of verification:
Type One is the Factory Audit. This is to verify that the company has a QC system in place and it as the production experience to supply you with the goods it says it can make for you.
Type Two is an Operational Audit or Due Diligence. This is to confirm that the supplier has a good reputation and is financially strong enough to stay in business long enough to complete your order. In other words, the company is not likely to disappear with your initial payment.
There are professional service providers available that conduct these types of verifications at very reasonable prices. I highly recommend you engage professional support if you do not have the skill set in place to audit factories on your own.
Here are some other tools you can use on your own which compliment the work of third-party service providers to verify suppliers.
It does not cost you anything to ask for references. If a supplier cannot give you a few happy clients to visit with, this is a big red flag.
Confirm that you have the right to visit the production line and check on your order. A supplier that comes up with a bunch of excuses why you cannot visit is one that does not have the ability to make your product and is scared that you will not like what you see if you visit. It could also be as simple as the supplier is a trading company and is worried you will cut it out of the supply chain once you realize it provides little value. Speaking of trading companies, sometimes, especially if your order is small, it makes sense to use them, but I dislike trading companies that say they are the factory when really they are just brokers.
Ask to see the supplier's QC manual. If it does not have an ISO- compatible and well-documented system in place for making a given product, run away. If you want to see what a Product Quality Manual looks like, you can check out a sample at www.PSSChina.com
After finding and evaluating suppliers, let us get into how to negotiate a good price.
Different industries have varying margins in China, and even within the same industry, some suppliers quote high, some quote low. So, there is no set formula for negotiation such as "If they say 100, I say 50 and we split the difference."
In the US, for example, we tend to think of negotiations as a sport with a set of rules and protocol. Two gladiators sit at the negotiation table and the one with the supplier negotiation ninjitsu is going to get the better price.
But in China, the rules of negotiation are totally different. There is no fixed time when the negotiation takes place or ends. In short, there are a whole set of negotiation tactics which are beyond the scope of this article and certainly outside of the skill set of the average foreign buyer, including myself.
I like to joke that Chinese people have been negotiating with each other for 5,000 years of continuous history and it is not like I am going to walk in the room and outnegotiate them.
But even if I cannot, I still have the ability to outresearch them. And this brings us to the most important weapon in your supplier negotiation arsenal: research.
Most of my negotiations take only a few minutes, but my research may have taken months. My typical negotiation goes like this:
Mr. Li, it has been a pleasure to get to know you and ABC company. I am impressed with the quality systems and the strong reputation your company has. However, my coworkers on the sourcing team are required to get multiple quotations from multiple suppliers. My staff has found a factory of similar size to yours with similar quality and lead-times in XYZ location, and their price is 8 percent lower than yours. We would prefer to do business with ABC if you can match the offer from XYZ.
It basically comes down to a diplomatically delivered "take it or leave it." If my research about the options is accurate, that supplier XYZ for example offers 8 percent lower prices, then ABC company will be aware that I know what it knows. In this case, what the going price is for a given product in China. Because of this ABC will more than likely come down in price.
But, never try to bluff or make up a fictitious second maker with prices made up out of thin air. Suppliers have a very good sense of the going price in China and they may even know most of their competition very well. If supplier ABC senses you do not really know the going price for a particular product, you will find it hard to negotiate effectively.
If you have issued a purchase order to a bad supplier because you failed to verify it up front, then no amount of even the world's best project management or intense QC is going to make a bad supplier great. So if you find the right supplier early on, you have put yourself on the right path and both project management and QC will be much easier.
In the US and most of the Western countries, when the PO is placed with a domestic supplier we sit back knowing the hard work is done and we just wait for the order to show up on time without a lot of drama.
While China has some amazing pricing, it is not known for excellent quality or short lead times. This means that the placement of the PO is the start of the supplier management process in China, not the end. It is rather rare for suppliers, even ones with as many as 1,000 employees, to have proper project management software that clearly defines and tracks who is doing what and by when, within their organization. Usually there is an account manager or sales person who takes point on walking your project through all the steps from production to delivery.
Salespeople are good at sales or can speak English, but most are not engineers, certified project managers, or even know their way around a production line. So here are some tips to help ensure your product ships out at the agreed time with the agreed quality.
Pick a factory that is the right size for your order. If you are a small buyer at a large factory, you will find it hard to keep their attention.
Make sure you communicate with the suppliers on a regular basis. If you do not ask for updates, you are unlikely to receive them. Be in contact when there is good news to share so that you do not become the "headache client" who contacts the factory only when things are bad.
This may sound obvious, but if you and your supplier do not have a system for project management then you need to be proactive and create one. For example, a simple Excel sheet listing action items, project gates, deadlines and responsible parties is a huge improvement over trying to manage via e-mail. Have this open project list serve as the agenda for periodic conference calls with your supplier. Once the tasks are mutually agreed, save this document for future reference. Keep a record of each week's agreed steps.
Build into your budget the costs of a few international trips to the China factory to keep an eye on things and build a good working relationship with your supplier. If you cannot afford to travel on your own or do not want to make the trip, then get an agent to represent you.