How to Assure Quality Imports from China

Many importers do not realize that quality control starts long before production actually begins. In fact, an importer’s quality control begins with the evaluation and selection of their supplier in China. To sum it all up, you must be sure that you do not only find the right products but also find the best suppliers in China to manufacture for you.

What have Price and Terms Negotiations to do with Product Quality?

All price quotations in China are calculated on the individual BOM (Bill of Materials) list. This is a document used by the manufacturer or other business to authorize purchases to be made or to request materials be pulled from inventory to fulfill customer’s order.

Bills of materials are of course only one part of a product cost. Other costs as factory operations, labor, and administrative costs all go into the net cost of a product. Finally, the supplier adds their profit margin before quoting their selling price.

When you negotiate prices with your supplier, the BOM plays an essential part in your supplier’s calculation. Actually, the most important part because most of the other costs cannot be changed. The factory cannot significantly reduce the labor costs otherwise workers will flee to other employers. The equipment the factory owns and the cost of energy for the manufacturing relatively set factory operations cost.

That leaves the BOM as the only negotiable cost. Just like most things in the world, this is accomplished by substituting cheaper materials from other vendors or outsourcing part of their production to subcontractors who are likely taking quality short cuts that your supplier does not.

You might point to the profit margin as a good place to trim the price. In reality, the profit margins are so thin that if they were further reduced it would not make much sense to even open the factory doors for business. Certainly, they do not want your purchase order if it means they will lose money on the deal.

Both options that the factory has for reducing costs are bad for your quality requirements.

Sourcing cheaper components or materials usually means inferior parts or materials. Otherwise, the factory would already be using these less expensive components.

The Difference a Switch Can Make

Consider this example of what could happen.

A factory receives a large order for 200K electric hair dryers. They face the situation where the customer’s requested price is too low. They scrutinize the BOM and find an electrical switch purchased from a reputable switch maker can be substituted with a lower cost switch made in-house.

The savings is only US$ 0.05 but when multiplied by the 200K dryers it becomes a US$ 10,000 cost reduction.

Now for the real quality issue. The switch from the specialized switch maker was lab approved and had its own approval certificate. The in-house produced switch does not have its own certificate. Rather the supplier covers it with the existing certificate for the hair dryer.

You may think that an approval is an approval and it is a good way to cut costs. However, if something happens later and the hair dryer starts burning because of a faulty switch, the lack of proper approval will become a big deal.

A component with a stand alone approval is always an advantage but does cost more money.

You can see now the direct relationship between negotiating cost and the effect it can have on quality. The more you squeeze the more likely it becomes that he will reduce the BOM cost by substituting good components or materials with inferior ones.

There is always the option of substituting A-grade components with B-grade or even C-grade ones. It is nearly impossible to discover these changes but the result will be lower performing products. This is especially true of consumer electronics that need ICs, capacitors, and resistors in A-grade quality to perform properly.

If you have a good long-term relationship with a factory, you may have some reassurance that your factory will not use this cost cutting method but there is no guarantee of it.

Hidden Low Prices

Here is a little known fact that will probably surprise you. Insisting on larger than usual payment terms (L/C 90-120 days) will be reflected either in the product price or in lower quality.

The Chinese are usually good negotiators and know ways to persuade you to listen to their arguments. If they insist after several rounds of negotiations that they will lose money by meeting your target price, you should not continue pushing this issue or it will simply become hidden somewhere else.

Look for some form of compromise to avoid getting into trouble with substandard production quality that could cost you much more than accepting a few cents higher Fob price.

Posted March 29th, 2012 in Quality Control For Imports From China.

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