With competitive prices, approved samples, and everything else in place, place your orders with the factories without delay.
In China, as well as anywhere else, people are highly regarded when they take action. If you visit the same factory five times without placing an order, you will become a low priority to factory management. The consequence is intentionally higher price quotes to discourage you from wasting their time in the future.
There is not much reason to continue requesting information from a factory that you concluded cannot perform to your standards. If you are still trying to make a final decision, shorten the factory list to those you still think will make successful business partners. They will honor this by giving you and your orders preferential treatment.
Before placing your Purchase Order (P/O), be sure you double check the earliest possible delivery date. Circumstances change and your delivery is an essential part of your Purchase order along with the price.
With your Purchase Order, the factory will ask you to open your L/C and provide all graphic materials for your gift box, instruction manual, and export carton. If the graphics and artwork has not been finalized by your company, the factory will put a clause in their Performa Invoice (P/I), their counterpart to your Purchase Order, which states that the final delivery date will only be confirmed after all prior requested materials have been received.
This will more than likely impact your delivery schedule. However, it is understandable. The factory cannot start production without receiving the necessary packing materials and that depends on the receipt of your graphic materials. Some importers have requested that finished products be stored temporarily. That is completely impracticable because the finished goods must be packed immediately as they come off the conveyor belt. Additionally, there is a high risk the goods will become damaged if not immediately packaged and the factory does not want to be responsible.
How the Factory Organizes the Production
I should also give you some more information about how factories plan their customers’ production. Factories have a limited number of production lines that are allocated to customer projects weeks ahead of time.
Besides production capacity, they need to procure the materials and components for the various customer orders. This procurement has widely changed in the last couple of years due to the shortage of raw materials. Nowadays, most factories have to pay for the raw material upfront or upon delivery to their warehouse. “Guanxi” is dominant because without a good relationship with the raw material vendors, factories may end up receiving the ordered material much later than anticipated. Meaning they cannot complete their customers’ orders on time. If they are lucky and that depends indeed on “Guanxi,” they can pay for their raw materials and their components after 30 days. You can see how the factories’ cash flow depends on punctual payments and their relationship with their banks. This relationship is often more important to their survival than taking additional new orders.
You should also know it is the factory’s discretion who gets their goods first. It is primarily an economic decision and a matter of good relationships between the factory and their customers. Please bear in mind, if you squeeze your factory too much for lower prices, you will automatically be allocated a later production slot, and there is nothing you can do about it.
Chinese companies are not appreciative when a sledgehammer approach is used to obtain better prices, although they may not discuss it openly.
When you issue your P/O to the factory, it is typically your last chance to negotiate prices.
It should be obvious that all information in your P/O must be final. Amending it later demonstrates to the factory that your company was careless drawing up the P/O and it makes dealing with your company somewhat risky in their eyes. Spend plenty of time drafting the content of your P/O before asking the factory to sign it. You may want to provide a draft to them first and have it checked. This helps save time-consuming amendments later on.
Here is a summary of what I suggest you incorporate in P/Os regardless of the product type you are dealing with:
- Clear and detailed product descriptions including requested color, measurements, sizes, etc.
- Clear and detailed packaging information including barcodes and shipping marks
- Order quantity
- Delivery date
- Port or airport of loading
- Payment terms
- Spare parts or spare units if any
- Agreed defective rate
- Guarantee clause
- Indemnification clause
- Late delivery clause
- Transshipment clause
- Clause for compliance with requirements in your home country
- Information whether goods must be inspected and by whom
- A clear statement that the mass production must comply with the submitted and approved samples
However, do not overdo it. I have seen P/Os that could have been issued by lawyers and you can imagine that factories don’t make the effort to employ lawyers just for the sake of checking P/Os. Remember, it’s all about partnership and if you are still afraid the factory will cheat you, your factory evaluation was not thorough enough.
Here are additional comments about what must be included in your P/Os:
- Order quantity – Should match the container loading capacity or the total quantity of products in case you want to place different products from the same factory in one container.
- Packaging information – Very important because it is a cost for the factory and could be manipulated in their favor. For instance, there are several levels of corrugated cardboard quality. These are measured in grams per square meter. If you did not specify the weight you could end up with a 2-layer corrugated cardboard sheet that is so thin that you could easily punch a hole through with your fist. This quality is unacceptable as a sales packaging because you cannot stack sufficient cartons on top of each other. The barcode information is also very important because the inspector has to verify it during the inspection. If a barcode scanner cannot read the barcode properly, the product cannot be registered during checkout by the hypermarket/supermarket cashier. Companies like Wal*Mart consider this a major defect and would not allow any shipment under such conditions.
- Spare parts or spare units – This depends on what kind of products you import. For technical products, you can negotiate 1 or 2% of free spare parts/spare units included in the buying price. The factory will of course calculate it. If these goods come without a guarantee or service agreement, you had better negotiate net prices.
- Defective rate – Putting a clause in your P/O will help to protect your compensation claim in case of epidemic defects or overall poor product performance. It splits responsibilities between the factory and your company. Nobody can demand that production be completely without faults and defects. Therefore, it is fair enough to allow the factory a certain percentage of defects as an upper ceiling limit. You have to negotiate this and usually the factory will have some historic figures in mind. Everything exceeding this percentage will be the factory’s responsibility. You may say I will employ a good inspection company, which will help to protect my interests. That may be true but there is still a risk that something has been overlooked or a defect shows up later. You can imagine that this could become very expensive because there will be compensation claims from your customers or demands for price reductions.
- Guarantee clause – Most countries have laws protecting the end consumer’s rights and provide them with a guarantee period of anything between 1-2 years. In some cases, retailers have even extended this guarantee period by another year. Three years is a long time for some products with a limited life cycle. Because it is a legal requirement (except the additional year offered by retailers) you must comply and protect your interests by adding a clause in your P/O. This gives you the right to ask the factory for compensation. Most factories however will not accept these clauses and you may have to negotiate to find a way around it to still protect your company’s interest.
- Indemnification clauses – This is another important clause that helps you if you become entangled in copyright claims or patent infringement claims. Unfortunately, Chinese manufacturers have a different understanding of copyright and patent infringements from western societies. They think, if they copy a successful product and apply some design modifications, it is their own design and they even go so far to have it registered at the Beijing Patent Registry under their company name. If you ask them, you will usually hear “No problem – it is our design and we have already registered it”. This will be of no help if the original designer sues you in your home country. Without an indemnification clause you would be in deep trouble and pay everything yourself.
- Late delivery clause – This is relatively easy to understand. If your goods cannot be shipped on time due to the factory’s fault, they will probably arrive too late for your customer’s promotion and that can become expensive as well. You have to be careful here because sometimes it can be your own fault because you failed to give the factory needed information, documents, or approval to start or finish production on time. I cannot provide exact figures because they vary from product to product and company to company but you should at least request the factory use an express vessel at their own cost to make up the lost time. In a worst-case scenario, the factory should share or completely pay the compensation costs your customers negotiated with you. Some importers may even include a clause that asks the factory to ship goods by air but in all these years, I have seen very few cases where this has really happened and usually factories will not agree to such a clause.
- Clause for compliance with requirements in your home country – This is another important clause because if the Government Authorities in your home country perform random checks at retail outlets, you may be in for a surprise when they find that the goods you supplied do not comply with local directives or laws. You should not assume that all factories are fully aware of all requirements in your home country. The opposite is mostly true. You, as the importer, are responsible to import only goods which comply with your countries laws and you must protect your company from damage for non-compliance by adding a clause in your P/O.
- Information whether goods must be inspected and by whom – This clause is easy. If you want the goods to be inspected, which I strongly recommend, then you have to inform the factory about the details. The inspection procedure was previously explained in Chapter 16.
- Information that mass production must comply with the submitted and approved samples – As mentioned several times, you set the quality standard by approving the samples and must enforce it now by not allowing the factory to produce anything else. If you are lenient in this request, your efforts evaluating the samples and factory will have been a waste of time.
Your specific product requirements may deem other P/O clauses be included. For instance, the garment or textile industries differ from home appliances. In general, you are supposed to be the expert for your products and should have the knowledge to figure out any other needed clauses.
Please be aware that any P/O is only legally binding after an authorized factory representative signs it. Sometimes factories delay signing for quite some time. In that case, the best solution is calling the person in charge to ask what is going on. There could be a reason for the delay but the factory will try to change the delivery date. Therefore, act immediately rather than waiting in good faith.
Other than adding your specific terms, try to write P/Os which are easily understood and are no longer than 2-3 pages. Anything else becomes too complicated and requires too much effort on both sides to read and comprehend. You should be able to establish the P/O format one time and then copy and paste the contents for other products without starting from scratch.
Don’t underestimate the importance of this chapter. If you make mistakes here, it usually will cost you money and respect. Since your P/O clearly defines the negotiated and agreed upon quality standard for your factory’s production, it is an integral part of your company’s Quality Management System.