The previous two chapters covered the first steps in the supplier process, namely Search For Suppliers, Request Quotes, and Negotiate With Shortlisted Suppliers. This chapter covers the next four steps, Approve Sample, Agree To Terms, Formalize Agreement, and Pay The Deposit. It also covers negotiating minimum order requirements.
Review the samples against your product quality criteria.
Most small importers don’t check that sample with sufficient care. Take the time to review it carefully. Check the look, function, performance, fitness, etc, as the supplier will try to make exactly what you confirmed. Consider what tolerances you would accept on measurements, what stress testing should it be able to withstand, how should it be packed, etc. All this extra information should go into your specification sheet.
In some cases, you will be asked to approve a sample that is not 100% as you need it to be. There might be good reasons for this, such as it not being practical to dye a few yards of fabric in the exact color. Or there might be poor reasons, such as their being confident they will work out how to fix a glitch before they start production. Don’t let them take shortcuts.
Expert TipDon’t be persuaded by any assurance that there is little risk of delay or of quality issues. As the buyer, you are the one taking on most of the financial risk.
At some point, make sure that you check the packaging as well.
Once you have reviewed the samples, make a final call based on quality and final quotes. The sample from the supplier you select is the approval sample, often called the golden sample.
Don’t burn your relationship with the other shortlisted suppliers. Something might go wrong with your preferred supplier, or you might need them in the future for another product.
Negotiate Low Minimum Order Quantity
Ideally, you would prefer to arrange a small first order just in case the product just doesn’t sell, or you get negative reviews and want to make changes.
Another reason to keep the production run small is if the factory hasn’t previously manufactured your product, or made it to your specs. You will want to validate the production process. Imagine if the dimensions are wrong, the two parts of your product won’t fit, and you need to scrap the entire batch. It happens! In this scenario, using the confirmation sample is also a good idea.
However, suppliers often have a minimum quantity, below which they don’t accept orders, called an MOQ (minimum order quantity).
Expert TipIf you are more concerned about reducing risk (by reducing order size) than price, then make that your negotiating strategy. Smaller factories may be prepared to bargain. Try to get your supplier the MOQ from whatever number they start from.
If the MOQ is otherwise holding you back, you may be able to overcome this by first finding out why it is being applied:
- Sub-supplier constraints. A common example is a fabric mill having minimum length requirements for dyeing. You could overcome this by using the dyed fabric over several styles, or you could buy more than you currently require and hold as inventory for future orders.
- Constraints with the final manufacturing process. Manufacturers won’t, for instance, entertain starting an assembly of mobile phones for just 1,000 pieces. However, you may be able to convince them to produce below their MOQ, at least for the first order, if you can demonstrate that you already have some signs of success. An example might be, that your product has been selected for selling in Apple Stores, but it needs to be tested in the marketplace.
- You’re too small. An MOQ might also be the supplier’s way of driving small customers away. That happens, too.
Agree To Terms
Make sure that you get written responses, if possible from a manager, as you reach agreement on each of the following items:
- Size of order.
- Unit price of product and the price of tooling (if any).
- Payment terms, like “30% after approval of golden sample, 70% after shipment”, and currency terms. Tie payments to approvals of quality and on-time readiness.
- Quality criteria, if possible in the form of an inspection checklist. Spell out what is not acceptable, for example, delays of more than 10 days, the proportion of major defects above AQL 2.5%, failure in a lab test that establishes compliance.
- Shipping terms, including incoterm, such as “FOB Ningbo”, loading port and receiving port (for sea shipments), lead time, for example, “40 days after deposit is received”, and penalties for late shipment.
- Important product specs, including labeling and packing requirements (like shipping marks on export cartons). If you have written a product checklist, refer to it in the purchase order (PO).
- That you expect the supplier to complete certain tasks during production, such as sending a sample, and forwarding their own QC inspection report with photos when 10% of the shipment is produced.
- The buyer’s right to send inspectors at any time.
Have these points included on a purchase order, along with the standard:
- Your full contact information including company name and logo,
- Supplier’s full company information,
- Unique PO number, and corresponding PO if applicable,
- PO date,
- List of the products by ordered quantity, unit price, and total price.
Here are the steps to follow:
- Complete and send a purchase order (PO) form. Use this Sofeast template if you don’t have one.
- Receive a pro forma invoice (PI) from the supplier. Verify that the information reconciles with the PO. The pro forma invoice will eventually become the commercial invoice.
- Have the PO and the PI signed by both parties and chopped by the supplier.
- Send the deposit as per the terms you agreed on. This is covered in more detail below.
Expert TipAlarmingly, many smaller importers don’t issue POs. They simply sign the supplier’s PI.
At the very least, you should arrange a purchase order. In China, any type of written business agreement is only binding the parties if their legal representative signs and then chops it (stamps it with their company’s red seal). This goes for POs too, adding weight to the commitment, although, in the unlikely event litigation, having a PO alone may not stand up in court.
Currently, only a small minority of importers draft a formal legal contract when buying in China. This contract is commonly known as a purchase agreement, manufacturing contract, purchase contract, sales contract or supplier agreement.
A contract is signed once and may be valid for several years. A purchase order is only valid for one order and usually refers to the contract. In some cases, the contract also acts as a frame agreement that makes POs unnecessary.
Don’t ask your supplier to propose a contract. You should work with a lawyer specializing in China business law on this. The contract must include a clause to the effect that litigation is to happen in China and that China law applies.
You should absolutely get a formal legal contract if you are planning on buying a substantial amount from a given supplier over time. And, of course, there are even more legal formalities involved if you want to IP protection.
Pay The Deposit
You will likely need to make an initial payment of 30%. Note that it is called a “deposit” but is very seldom returned should something go wrong. You should have approved the sample, completed the specification sheet, signed off the PI, etc, before you make payment.
Many suppliers request payment to their personal account. This is not wise, even for small orders. Be sure that you only send money to the company that is mentioned in the contract and on the PI. Call your supplier for confirmation first. This is because there have been instances of hackers infiltrating a supplier’s email system and then phishing for payment to their own bank account.
Generally speaking, the larger your order, the more favorable payment terms you can negotiate, like the first payment being very small, or splitting payments into three, with the third payment coming after you receive the goods. Unless you are a large buyer (in which case paying in RMB might make sense), it’s easier to pay in USD.
The most common ways to make payment are covered in the Payment Methods chapter.
Monitor The Order
Make sure the supplier knows that you are paying attention. You are less likely to experience long delays if you establish a follow-up process with them and hold them accountable for their promises. Don’t just send emails only when problems come up, or they will avoid releasing information to you.
Here is an example of the tracking sheet Sofeast uses with some clients.
|All components purchased||Oct. 6||Oct. 9||+3||Buyer’s deposit received on Oct. 8|
|All components received||Oct. 12||Oct. 17||+5|
|Start of mass production||Oct. 14||Oct. 24||+10||Our workshop is very busy|
|Production samples sent||Oct. 21|
|20% of pieces are completed||Oct. 21|
|Packing 80% done||Oct. 25|
|Final inspection||Oct. 28|
|Shipment date||Nov. 5|
- There are often ways to convince the supplier to start with a trial order, and you should push for that if your product has never been made in that factory.
- Get written confirmations on the most important terms before you issue an order, let alone pay a deposit.
- Set the right incentives by tying payments to approvals of quality and on-time readiness.
- Approving a sample is not sufficient guarantee. You must also document all important specifications, tolerances, etc.
- Stay on top of the production schedule, by showing that you are paying attention to timing.
- What Should Be In A Purchase Order (PO)?
- Keep Some Leverage With Suppliers
- China Contracts: Make Them Enforceable Or Don’t Bother
Sofeast assists companies manufacturing in China with quality assurance, supply chain management, and engineering (new product introduction) solutions. Started in 2006, owner-operated, and helping 200+ SME clients worldwide become successful in China.