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China Sourcing 101: Contracts And Negotiations- Quality Considerations

 

China sourcing tips when it comes to quality

During my 20 years living in Asia, I’ve owned a number of different business entities in greater China, ranging from China WFOE’s to HK holding companies to service companies. I’ve represented fortune 500 companies as well as startups in their dealings with Chinese suppliers. In one of our recent busy years at PassageMaker, my team was responsible for sourcing over 200 million USD worth of goods in China.

I was the point person for negotiations and contract review with the suppliers. I’ve taken Chinese companies to court (and won!) over disputes arising from poor quality, broken promises, pirated goods & late deliveries. The legal system has come a long way in China. Foreigners can get a fair shake if you know how the system works.

I have taken the liberty of creating a short series including video tutorials and expanded transcripts that goes into some detail about how foreigner buyers can protect themselves in China.

Let’s dive right in to today’s installment: “ Contracts And Negotiations: Quality considerations.”

And it’s not enough to state in a contract/PO that the agreed spec is based on the pre-approved golden sample because a physical sample can be interpreted in many ways. If you take any two items and look close enough, there will be some type of variance in some aspect. You may look at production parts and say it is “not per sample”, factory may look at same production pieces and feel that it is per sample. “Made to Sample” leaves far too much room for interpretation.

Here are 5 better ways to limited you exposure to quality issues:

  1. It can’t hurt to have a mutually agreed reference sample. But it is even better to have a well written QC check list that details every important aspect of what is important.
  2. Your inbound QC should be the same as factory’s outbound QC.  Share as much information as possible so they know exactly what you want.  Since a QC check list is a written standard, you can make his check list part of the actual contract or PO.
  3. Even better than saying “production much match the golden sample” is saying “production must match the golden sample and confirm to the agreed QC check list”.
  4. You are also wise to use a 3rd party to check the QC to confirm the factory actual made what you asked for as agreed in the contract.
  5. Structure your payment terms so that payment and QC are linked. You may need to give a deposit to start production, but don’t make the remaining payments until you or a 3rdparty has done the pre-shipment inspection.

As buyers we need to be professional in our ability to create a written standard for our expected quality.

The ultimate goal is NOT to have defects and the best way to avoid defects is for the factory to have a crystal clear understanding in terms of what is your standard and how to inspect for that standard (including what tools and techniques are required).

For example, if you are buying red umbrellas, it is not sufficient to say “my standard is a red umbrella”.

A professional buyer would state the PMS or Pantone # of red they want and also offer counter samples of 3 things:

  1. The darkest acceptable red.
  2. The ideal red.
  3. The lightest acceptable red.

The inspection protocol should also be well defined. For example, umbrellas are pulled from the line at random per AQL level 2, inspected against agreed counter samples, held at arm’s length under natural light.

Any China sourcing veteran will agree- if you don’t put down in writing a scientific and repeatable inspection process for the key aspects of your product, there is a high likelihood you will get exactly what you didn’t want.

Related content:

To see how a professional contract manufacturer lays out the internal inspection standards for inspectors and workers on the line, visit PassageMaker’s Product Quality Manual.

Perhaps the best advice is this:

As a general rule, the buyer should write the product specifications pretending that the supplier is new to the industry. Really “spell it out”.

What happens when you have quality problems?

Despite the best efforts to prevent it, at some point in your career you will receive non-conforming goods. So get ahead of the problem and ask the supplier in advance, “if there are defects, who pays for the rework?”

In my 20 years of working with suppliers in Asia, I’ve had lots of missed lead times because of quality problems. But in all those years, not once have I had a supplier say to me “Mike, we missed the lead time by about a week, let us pick up the FedEx charges to send the replacements to Las Vegas.” Not once. Until I started putting in my contract, if the lead time is missed by X days I get X discount.

Sometimes the suppliers forget about those agreed terms and I get a call at the eleventh hour saying “Mike, you know we’re friends and I hope you understand but we just got this big order from Disney, is it ok if we ship your items a week late? Can you do me a favor on this one?”

And my answer is always pretty much the same. “Mr. Wang, sorry to hear about that and luckily I knew that this might happen because it’s close to Chinese new-year so I built in a two week window or padding with my costumers but more importantly I’m so glad that we have this contract in place because we could really use that five percent discount, so you take your time I’ll give you up to 14 days to ship out.” What happens next…it magically ships out the next day to avoid the discount that is applied for each day late!

Because the penalties were pre-agreed, Mr. Wang can’t renegotiate at the 11th hour.

Respect your commitments to the supplier and don’t ask for favors

You made the effort to make a contract with clear delivery dates but perhaps you want it a bit earlier than agreed. So you ask “Mr. Wang, my costumer would love it a week early, can you ship ahead of time?” Realize you’re asking them a favor. Don’t think that the supplier is not keeping score. Later, when they have a problem meeting the ship date, they’re going to ask the same thing to you “We’re going to miss Christmas this year, is it ok if we get it in early January to you rather than early December? We did you a favor last time, now we need this favor.”

Don’t break the terms of your own contract because that leaves the suppliers an open door.

3 essential items when sourcing from China & elsewhere

3 essential items when sourcing from overseas

Excerpts from Smart Company’s interview of PassageMaker’s Mike Bellamy about sourcing from China.

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Thanks to a massive improvement in quality, logistics and infrastructure over the past decade, it has become easier and easier for small businesses in Australia to expand beyond national borders and infiltrate huge consumer markets in purchasing powerhouses like China. However, it still can be a daunting task for small business owners to know where to start when it comes to getting their enterprises up and running outside of Australia. How do you choose the right suppliers? What countries offer the best quality and fabrics that you are looking for? How do you successfully communicate across language barriers?

Having worked with Australian customers for 15 years – at one stage they made up around 85% of my business – I’ve had the opportunity to observe first-hand the most common challenges small businesses have encountered when embarking on global expansion. Over the years I have developed a three-tiered approach, which I refer to as the ‘Holy Trinity’, for building a productive, mutually beneficial relationship with international suppliers to help take homegrown businesses to the world.

Mike Bellamy on Guanxi

I cannot express enough how important it is to build a strong, cohesive relationship with your international factories and suppliers; putting the human effort in is worth every cent. Mutual respect goes a long way and it’s vital for you to be regarded as a person, not just a purchase order number. I’ve found during my 20 years working as a Westerner in China that even the smallest things go a long way to developing ongoing, honest working relationships. It’s not necessarily all about learning to speak another language fluently or understanding all the cultural nuances; it’s about finding ways to connect and build a bond based on trust. Simple gestures like sending Christmas cards, encouraging your kids to be pen pals or visiting your factories in person are all great strategies for building on both your personal and professional relationship.

Mike Bellamy on Contracts

Small businesses can sometimes find the development and implementation of contracts overwhelming, especially when they face the challenge of communicating in a language (both figuratively and literally) that both parties can understand. Even if legal documents need to be bilingual, it is absolutely imperative to apply the common sense that you would use if you were doing the same type of business with an Australian company or supplier. Integrate simple and easy to understand clauses in all contractual agreements and if you’re working with China, ensure you register your intellectual property there before you even begin the sourcing process. Since the rise of the middle class and increase in China’s consumer market, there is a now a well-defined patent system in place that is cheaper and more streamlined than the domestic process. In fact, the most recent statistics from the World Intellectual Property organization show that 7% of international patents were filed in China.

Mike Bellamy on Supplier Verification

 When doing business at home, there is no way that you would commit your time and money to a supplier who hasn’t been validated and verified as operating within lawful industry parameters. In saying this, it is essential that when expanding your enterprise internationally you perform your due diligence and do your research just as you would at home. This can sometimes take weeks, or even months, but it can mean the difference between your business sinking or succeeding. The majority of companies and individuals who provide sourcing services or run a factory out of Asia are almost totally unregulated in terms of truth in advertising, codes of conduct and service standards.

Mike’s 10 quick tips for starting your international sourcing business:

  1. Know your product
  2. Understand where you want to sell it
  3. Establish access to the market that no one else has
  4. Ask yourself what is important to you as a buyer
  5. Think from the factory’s point-of-view
  6. Sell the factory on why they should work with you
  7. Structure payments to a supplier’s performance
  8. Request samples throughout the entire production process
  9. Manage your expectations
  10. If you find a good factory, hang onto them

Find the original article here.

Mike Bellamy is the founder of the PassageMaker Group and is an instructor at China Sourcing Academy. He will be presenting in-depth seminars at the upcoming International Sourcing Expo Australia in Melbourne.

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China Sourcing: Warranty Issues and Quality Systems

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Warranty Issues and Quality Systems

An importer of notebook computers and tablets writes in to get some advice on quality systems and warranty issues when buying from China.

I am currently importing from China and I am very interested in all that you have been teaching over at www.ChinaSourcingAcademy.com , now I would like to ask if PassageMaker provides certain premium services when it comes to linking warranty issues and quality issues altogether.

Assuming I use your service to import good to my country which is Malaysia, how will you deal with warranty issues? Let’s say for example if I were to buy 1000 tablets right now via your company and after having them shipped here, I realize that 2.5% of the goods are defective, how do I go about fixing this issue? Do you have any service which actually guarantees the quality of the goods or some sort of assurance that your clients get what they pay for?

I am actually thinking of buying tablets and other gadgets from China but the warranty issue does worry me a little as I have heard that factories don’t really accept the items back and even if they agreed to fix it, sending it back to them and spending all that money just for shipping the goods back would eat up most of my profits. I would like to know if you do have a solution to this and if so, I would love to use your services. Thank you, Mike.

Warranty Issues and Quality Systems

Yes, PassageMaker can help. We are a China sourcing agency that helps our clients find and manage vendors with particular attention to quality issues and warranty issues as you mention.

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To be specific, outsourcing supply chain management is a service which includes a professional review of your agreements with suppliers to make sure you have clear QC standards and that the contracts protect you in terms of what happens if warranty issue arise due to non-confirming goods.

This service, for example, is designed to ensure non-confirming goods don’t get shipped.

Between those 2 services, you would be very safe. Fees are explained at the PDF download found here.

 Related Content for Warranty Issues and Quality Systems

Video 9: How to return defective merchandise to China

Do QC BEFORE the goods are loaded. Good luck sending defects back to China.

 

China sourcing: Help creating a Purchase Order (PO) template

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The importance of having a good Purchase Order (PO) in place when sourcing in China can’t be stressed enough.

The document sets the foundation for your relationship with your supplier. A buyer without a good PO/Contract gives too much leverage to the seller and allows them to manipulate the relationship to their advantage.

As part of PassageMaker’s Import/Export Management service, our account managers take our in-house PO/Contract templates then work with the local lawyers and project managers to create a robust document specific to the needs of our clients.

However, if you are not yet in a position to retain the services of a professional buying agent like PassageMaker, here is a behind-the-scenes look at how any buyer (large or small) can create an effective and affordable Purchase Order template that offers real protection in China.

Let’s start with the free stuff:

Here are some blog posts I wrote related to PO’s/Contracts:

7 ITEMS YOU PROBABLY FORGOT TO PUT IN YOUR CONTRACT WITH THE FACTORY

PURCHASE ORDER

Now let’s look at some very affordable options for getting professional help writing your PO.

On Amazon you can find guidebooks (do an Amazon search for China+ Sourcing) that offer templates and samples of key documents, including the all-important PO/contract.

For example, My guidebook is available for 58 USD and includes various templates and check lists. The PO template is also available as a standalone document in excel format. I recommend buying the book and templates together as a package because the book explains how to negotiate the terms and set up the PO in a way that protects the buyer’s interests.

While a template is a good start, much better would be having a custom document in bi-lingual format that is specific to your situation. An English speaking Chinese lawyer in China can provide this for a few 100 USD. Here is more information: AsiaBridge Law

Consider engaging an advisor to look after your PO’s/Contract as part of supply chain management. Here are 4 options for your consideration ranging from freelancers to large consultants:

OPTIONS FOR SUPPORT WITH SOURCING AND SUPPLY CHAIN MANAGEMENT

you can also visit www.SourcingServiceCenter.com for my list of endorsed service providers.

In summary, now that you know how to get help building an effective document, even on a tight budget, there is no excuse for not using a well-crafted PO when buying from China.

Too good to be true, rings true, when buying from or selling to China!

Too good to be true rings true when buying from or selling to China

Nothing is as it seems in China

When I wrote blogs about protecting yourself while sourcing in China, I got a call from an overseas client who was trying to sell his wine to China. He told me he would fly to China to sign a contract with his buyer. The Chinese buyer approached the company and asked to buy seven containers of wine from him. It seemed like a good thing, however “too good to be true”, so he wanted to consult with me after the meeting with his buyer.

A couple days later, my client came to me with the signed contract, “It seems we are safe, because we will not send over any goods before we are fully paid.” However, no one orders seven containers of wine for the first order, unless wine has sold very well already. I reviewed the contract with my suspicion.

The buyer will pay 30% deposit, and then the balance before the goods are delivered, so my client wouldn’t supposedly suffer any loss. However, according to the contract, the contract should be notarized by a local notary officer in order to be valid. Since it’s an international sales contract, both parties must pay for the notary fee fifty/fifty.

The Chinese buyer said, my client doesn’t have to go to the notary office in person, they can let the buyer to do the notary, as long as my client pays his share of the notary fee, which is equal to 6% of the amount involved in the contract.

The Chinese buyer provided a sample of power of attorney together with their bank account.

However, I pointed out that:

1. Once the parties signed the international sales agreement, the agreement will be valid and enforceable. No notary is required by the law;

2. If notary is necessary, then both parties have to show up in the notary office to sign the agreement in the officer’s presence. No proxies are allowed!

It’s a trick. Its aim is not to get your goods (almost everyone’s aware of that), it scams you by asking you to pay a government fee. If you don’t know about Chinese business rules, it seems reasonable. But as I said, no one is willing to pay for seven barrels of wine for the first order, there must be something unusual!

So, still the same words, “too good to be true.” Whether you are buying from or selling to China, do some research, or consult with local expert before you make the final decision.

China sourcing: Be smart when drawing up contracts

China sourcing Be smart when drawing up contracts

This morning, I spoke with a client. He said he needs a simple supply contract to use for his sourcing business in China.

I sent him a checklist, so that he can let me know what he expects the contract to specify. He replied that he needed quick advice, he can’t sit and write all this. He repeated saying that he needed a “quick” and “simple” agreement, so he can use on “many, many products monthly”, and use “across different factories.”

I began telling him that if he wants to use it that way, the contract must be comprehensive and can’t be simple. Some businessmen tend to think lawyers complicate things, even though he needs just a simple agreement.

So I want to clarify here: if you hope your contract will be binding to your suppliers, and may be used as the basis to solve any potential dispute you may have with your suppliers, the agreement cannot be simple!

For example, you can’t just say that “the supplier must provide good quality products.” You have to verify your idea of “good quality,” and specify that the supplier must acquire quality authentication for certain types of products. If necessary, you should assign an inspection company to do inspection during the production or before delivery, if the supplier fails the inspection they should reproduce the product, however, if they can’t deliver the goods to you by the deadline, they will have to pay a fee for late delivery, etc.

How can a supply agreement be simple?

In fact, a simple agreement is akin to no agreement.

My advice to all buyers:

1. If you need a supply agreement, give yourself and your lawyer some time. You have to decide what your expectations of the agreement are, and let your lawyer know about these.

2. During the process, speak with your lawyer thoroughly, make sure you understand each other. China is probably a totally different jurisdiction than the one you are familiar with, so a thorough discussion will make sure the contract satisfies your requirements.

3. Don’t expect a quick and simple agreement, a responsible lawyer won’t give you such an agreement. Lawyers do not want to complicate things, they just want to make sure you are protected by your agreement.